As we near the conclusion of 2020, there are several actions that can be taken to prepare for a successful 2021. One of the most important, and often overlooked, is creating a thorough budget for the coming year. There are numerous benefits to creating a budget that can lead to increased profitability.
The first step in the budgeting process is creating a sales forecast for the coming year. A sales forecast should not be based on a flat percentage growth. A sales forecast should be the result of analysis of the current customer base and the business development strategy. The current customer base should be analyzed for opportunities to grow the relationship. The business development strategy should define the goals regarding the addition of new clients / new revenue throughout the coming year. Combined, this should form your sales forecast.
Next, expenses should be analyzed. There are four broad expense categories to analyze:
Cost of Goods Sold (COGS) – Can processes be changed to increase efficiency? Are your vendors providing the best prices / value?
HR – Are you hiring the right level people at the correct salary? Can you pay less for equal benefits?
Variable Costs – are you getting return for your discretionary spending?
Fixed Costs – Is what you pay for non-revenue generating items (insurance, rent, etc.) appropriate? Do you need to shop the market?
Finally, analyze needs for the coming year. Do you need a new piece of equipment? Do you need to add personal? These items are included in an effective budget. Following these steps will provide you a sound budget for the upcoming year. A sound budget provides many benefits. It provides a benchmark against which to compare results. It defines to your
organization the goals of the company for the coming year. It provides tools for financial control. Most importantly, if forces ownership / management to quantify what to achieve, how to achieve it, and what is needed to achieve it.
The experts at Viking Advisory Group can assist business owners with this valuable process. With years of experience in numerous industries, we can provide structure to the budgeting process and anticipate challenges that come with growth and change in the market. Please feel free to contact us so that we can discuss how to assist your business.