Building a Business Budget
A new financial year is like springtime for your business. Full of opportunities to breathe new life into existing processes and ways of thinking. We love this time of the year for new resolutions.
A simple way to start making big changes is by setting a business budget. Sounds like a daunting task but a well-planned budget is the key to good financial health.
Tanya has a different approach to setting a budget – she builds a budget from the bottom up. Start by determining what profit you want to make. Then review all expenses, looking for opportunities to reduce costs. Your target revenue is determined by target profit plus all business expenses. It should be bottom line profit that drives the top line revenue.
For example: this year you want to make a net profit of $60,000. Your operating costs sit at $150,000 and direct costs are around $230,000. To achieve this profit your annual revenue needs to be $440,000.
Here’s four simple steps for building a business budget:
Step 1: Net Profit
Decide how much profit you want to make in the next 12 months (after paying yourself a salary).
Step 2: Operating Expenses
Look at every operating expense like car registration, phone and internet, insurances. What can be reduced, removed or renegotiated? Small changes to business expenses can make a big impact.
Step 3: Direct Expenses
These are costs which directly contribute to making or selling your product or service like wages, freight. It is harder to reduce direct expenses but look for saving measures.
Step 4: Add Net Profit + Operating Expenses + Direct Expenses to get your Target Revenue.
Break this target revenue down by month (consider any seasonal adjustments).
The process of building a business budget lends itself to strategic planning. How are you going to achieve the revenue target to ensure the net profit? Do you have the capacity within your team to achieve this revenue target? Do you need to review your pricing? Will you need new revenue streams? The start of a New Financial Year is the perfect time to set some targets