Done well, creating an annual budget can be one of the best activities your company does. By creating a budget, you and your people can get the opportunity to understand how your business works. Additionally, it is out of a budget that measurable goals are created. This includes goals for sales and production (these are not the same), and expenses and profit.
Below are 3 easy ways to get started, as well as our recommendation for 2011.
- Leads and Sales. Have you been steadily tracking your leads and sales each month? By studying your company’s trend over the last 3-4 years, you should be able to make an accurate forecast for 2011. Which months have the highest and lowest leads and sales? Do you think this trend will continue? What kind of increase or decrease are you anticipating for 2011? Use the data to formulate anticipated sales for 2011. Using your average sale amount, you can calculate the total amount you anticipate selling.
- Production. As I mentioned earlier, sales and production are not the same. If your company sells $1.0million, you still need the manpower to produce it. In this scenario, look at how much revenue you have invoiced each month over the last few years. Monthly High and Low averages are meaningful. Do you see this trend continuing? What does a 10% increase look like? Most importantly, how many people will you need to produce it?
- Overhead and Break-Even. In this scenario, the first step is to define your Overhead needs for next year. How much will you pay yourself? How much will you spend on marketing, operating your vehicles, etc? The next step is to calculate how much revenue you will need to cover your Overhead using the “Break-Even” formula, “Break-Even” = Overhead / Gross Profit%.
During periods of growth, scenarios 1 and 2 will help your organization set high goals and make the most of a good economy. During periods of recession, such as now, the more cost-sensitive scenario 3 will help you control expenses and generate efficiencies. Each scenario is designed to help you to “Define Winning” for the coming year. Share these goals with your people and review your status every month. When you define winning for your people, you will keep your company focused and on course for success.