by Todd Schorle, Senior Executive Coach
It’s hard to get somewhere if you don’t know where you are going. The act of budgeting will aid in planning, directing and controlling functions of your company. The overwhelming value of budgeting is not a perfect budget that you aim to hit spot on, but rather the process, the experience and the discovery through learning how to predict and what to examine. Having a budget will enable you to set specific goals, build and execute plans toward those goals, and periodically evaluate your achievement of the objective.
A budget will provide insight into:
- Operational decision-making processes
- When to hire staff
- Whether to increase rates
- Employee pay (raises and bonuses)
- What training your team needs and when they need it
- Achieving sales team goals, rewarding sales efforts
- What reporting is needed for shareholders, your leadership team and managers
- How and why you need accountability
How to start budgeting
Step one: figure out year-over-year growth
Look at what you did last year. Look at what you have done this year to date and project out what you will do through the rest of the year. How much did you grow year-over-year? What is your outlook for next year? What is your target to grow?
Step two: Build the budget based on year-end total
Take the seasonality trends into account and build a budget that looks at the year-end total, then take that total and break it into quarterly chunks so it is easier to manage. For most small companies, month-by-month budgeting is too granular, but it makes sense to have a quarterly snapshot that you can (and will) measure against. (Sea-Level highly recommends using Service Leadership benchmarks.)
Step three: Align your chart of accounts with your budget
Now that you have a top-line target of your revenue by quarter, take your chart of accounts and simplify it in line with the Service Leadership chart of accounts, specifically the percent of gross margin (GM) or the percent of revenue projections. Using these projections, you can allocate dollars to Cost of Goods Sold (COGS) and Selling, General and Administrative expenses (SG&A) buckets.
This is a broad stroke budget but gives you the most useful view with the least effort. The most important item to measure by is the gross margin percent produced by operations, so getting your COGS in line is very important. While SG&A can be measured as a percent of revenue or a percent of GM, I recommend the percent of GM as it is a more accurate method of navigating to profitability, however, it is valuable to run the numbers both ways to see if there are any standout differences.
Step four: Compare your results and adjust
Once this exercise is complete, look at your results last year and see how far off you might be. What needs to change in order to conform? In terms of the levers you have to pull for immediate results, the lever with the fastest result is to cut your expenditure on SG&A and COGS in line with the percent published by SLI. What I mean is this: adding revenue takes time, but right sizing your spending has immediate benefits. If your top line revenue is too small, your expenses may be hard to get in line with best-in-class, so shoot for better than last year. If you can’t change the SG&A expenditure, focus on continued revenue growth to make up the difference.
Step five: Solidify your fiscal plan
After you have a quarter-by-quarter topline revenue target and have translated that into a spending budget for your COGS and SG&A, you need to circulate this budget to the leadership team to ensure the other members of your team are on board with the projections. After all parties have vetted and voiced concerns, now comes the hard part: you need to translate that fiscal plan into strategic and tactical actions that your team will follow to make the budget a reality.
Step six: Put the plan into action
Translate your revenue projections into sales, marketing, and staffing plans. Create a payroll budget around your staffing levels for COGS and SG&A. Publish and agree upon the hardest number, the target gross margin dollars, and percent you are shooting to produce.
Identify who oversees:
- Revenue (dollars in the funnel)
- Operations (Gross Margin percent of revenue)
- SG&A expenditure (SG&A percent of gross margin)
Go forth and budget
Now you have a working framework for your budget and a strategic plan. Work with the team to develop tactical plans to support the big picture. Set a calendar reminder for each future quarter to review the progress and track your quarterly attainment of the budget target.
Don’t be disheartened if you don’t hit your target the first time. Budgeting is a process and it can be quite challenging. The effort of shooting for something won’t be wasted even if you don’t hit the bullseye this time around.
Sidebar: Expert Level Idea – BMW Budgeting
BMW budgeting is not the car you will buy when you hit your bonus out of the park by attaining your budget, but rather the concept of planning three actual budgets:
- The Best Case
- The Middle of the Road
- The Worst Case
By having a high-medium-low approach, it gives you the ability to quickly see where you are going and to adjust tracks to a different path if things are over-preforming or underperforming. Your target, of course, is the middle of the road, but valuable insights can be garnered from building the two alternative versions, low to look at risks, or high to gauge potential upside from a higher close percentage or additional wins.