So, you read the first blog on budgeting and have compiled a lot of information about your sales history, projection, goals, etc. Now that you have a sales budget, you can start to build an expense budget that corresponds to the income you can or plan to generate. Remember, we can assist you in developing a budget or finding other ways of understanding your profitability.
I am a big fan of budgeting. Even if you are a small business, a little budgeting goes a long way. It can be the blueprint to your success or the dictionary of terms as to why you have not succeeded in the way you’d like.
Taking the time to look at each line of revenue and expense, incorporating what you know about your current and future situations and forecasting what should happen is a powerful tool. Once you get the system down, you will never want to operate without a budget again. You will surprised at what you will discover about your business and how it empowers you to act accordingly and make decisions that will improve your profitability. Comparing your budget to your actual performance makes it a lot easier to see how to correct your course; it makes the problems to greater profitability much more obvious and we all know that if you can see the answer, it is a lot easier to act on it.
I like what is called “zero-based” budgeting. This means that you start at ground zero and build each line of revenue or expense from the bottom up. For instance, my sales are made up of hours billed. So I start with 40 hours a week and determine how many of them I should be able to bill. If I determine that all administrative and other non-billable tasks take up 20 hours a week, then I should be able to bill the other 20 hours. So I start building my revenue based on that bench mark. I then hold myself accountable to tracking my non-billable time and invoicing on the last day of the week. Any week that I do not bill 20 hours requires a review of where my time when or what I need to do to generate new clients and billable time. My review of the previous week has many times uncovered billable time that I forgot to bill, so the process is definitely worthwhile. Reviewing the previous week identifies missed opportunities to bill for work done and I have no other way of catching that error, so it is an important step to a company that bills by the hour or project.
For an expense line, let’s look at advertising. I lump everything together into one account, but you may want to differentiate between the various types of advertising you purchase. I start with my currently running ads and what they cost me. I then add to it any direct mail pieces that I plan on sending, both the cost and the postage. I add the cost of my quarterly newsletter which is sent out via email. I look at the money spent on internet advertising and I make a chart of the money spent versus the success of the dollars spent. I review all of the methods of advertising I use and I determine which have been the most successful. Once I have reviewed what I am currently doing, how successful I think it has been, etc., I decide what I will continue and how much money I will spend. With internet advertising what it is these days, you need to have a system for tracking success. How many inquiries do you get every week, how many inquiries become clients, and so on. Do not continue to spend money on advertising if you do not know whether or not it is working. Select those ad campaigns you are going to use, how frequently you are going to use them and how much it will cost. Then act accordingly and measure the results for future budgeting.
Just the process of going through each revenue and expense line will open your eyes. When I went through this process recently, I realized that I was billing significantly fewer hours than were available. I realized how much revenue potential I had not tapped into. I knew then that I had to keep better track of my time for billing purposes and I decided to make a push for growth to fill the available hours. Given that, my advertising budget had to be revised to accommodate this goal. So a budget is also a living breathing plan, you change it according to what is and is not working, revised sales estimates, etc.
I also developed a system for my employees to better track their time and how much was billable or administrative. If I paid them 40 hours a week, I asked them to show me how the 40 hours were spent. This led to finding efficiencies that I did not know we even needed until I discovered that the monthly newsletter was taking 4 hours to design and send. When my employees had to start tracking their time, suddenly billable hours increased because they became aware of how much time they spent on client projects that they were not including in their billable logs. The entire process was valuable both from learning where time was spent, how we could improve the processes we were using and billable time that was missed. These are the sort of gold-mine opportunities that preparing a budget will illuminate.
A budget is the starting point and the map that enables you to control your profitability more effectively and efficiently. Try it. You’ll see. The process is not just worth your time, it will save you time in the future and it will make you more profitable, more in control, more successful. If you do not discover something really worthwhile during the process, I will be completely amazed.
If you use QuickBooks, they have some great tools for setting up a budget and monitoring your actual performance compared to your budget. Call today to set up a free 1/2 hour meet and greet to discuss your needs and how our services match up.