With a new financial year comes new opportunities for your business. This is the time when new goals and resolutions are made for something to strive to in the upcoming year. One way to make some big changes is to implement a business budget. While this may sound daunting, it is key to ensure good financial health in the long term.
One way to set up a budget is by building from the bottom up. Firstly, determine the profit you want to make. Then look through your expenses for any opportunities to reduce costs. The desired revenue is then determined by calculating target profit plus all necessary business expenses.
For example: this year you want to make a net profit of $70,000. Your operating costs sit at $165,000 and direct costs are around $270,000. To achieve this profit your annual revenue needs to be $505,000.
The following are some simple steps to help build your business budget:
Step 1: Net Profit
Determine the profit you want to make in the next financial year, - typically 12 months - after paying yourself a salary.
Step 2: Operating Expenses
Review all your operating expenses such as car registration, phone and internet, insurance. Can any be reduced, renegotiated or removed all together? These changes don't need to be drastic as even small changes can make a big impact to a business.
Step 3: Direct Expenses
This includes costs which directly contribute to either the making or selling of your product/service. Typically wages and freight would fall into this category. While it is more difficult to actively reduce direct expenses, look for saving measures to implement.
Step 4: Add Net Profit + Operating Expenses + Direct Expenses to get your Target Revenue.
Further break this down to have your desired monthly revenue, while also considering any seasonal adjustments.
Now comes the questions. Is your target realistic? What was you target last year? Can you achieve the goal this year? Review any available historical data to justify the numbers.
These steps can be applied to a companies strategic planning as well. What will you do to achieve your revenue target in order to meet you net profit? Do you have the capacity to achieve it? Should you review your pricing? Is another form of revenue needed?
A new year is a good time to set new goals and targets, as well as KPI's.