When it’s time to begin your annual budgeting process, do most of your team members want to run for the hills? If so, I’ve got good news for you – the budgeting process, including budgeting for growth, does not need to be a painful experience. In fact, if everyone arrives prepared, the process I’m going to describe here can usually be completed in two two-hour meetings.
Here’s what you need to do:
• Analyze your current level of business. Before you can budget for growth you need to have a basic understanding of what’s driving your current level of business, so that you can evaluate whether or not you can reasonably count on this level continuing.
• Take a close look at your goals. Your goals will drive your budgeting priorities. What changes need to happen in order for you to reach these goals? What additional resources (people, cash flow, machinery, etc.) will you need?
Before you get too far, take a close look at whether achieving your desired growth goals would actually strengthen your company’s financial position. As I discussed in a previous article, it’s possible to grow yourself right out of business!
For example, say your goal is to increase sales by 10% through a new contract with a big box store. In this case your sales volume would go up, but if the big box store squeezed you on price then your gross profit margin would go down. If they demand longer credit terms, you may have to borrow money to finance these new receivables. Add in the cost of any additional people you need to hire to service the business, and you might actually lose money on the deal.
• Develop a plan of action and get 100% buy-in. How will you obtain the necessary resources to reach your goals? What do you need to budget for, and who will be responsible for performing what? As part of this step, be sure to assign some metrics to your goals so you’ll be able to measure and report on performance.
• Crank out the numbers. Going through the above steps will give you a good foundation for a business plan. All that’s left in the budget process is to decide how detailed you want your budget to be and calculate the numbers for each line item.
Budgeting does not need to take months…and even a minimalist approach can result in the solid plan you need.