SBA 504 Interest Rates | May 2024 | 10 Yr:  6.908%, 20 Yr: 6.656%, 25 Yr: 6.555% *rates may vary Learn More »

Look Into Your Crystal Ball

Nov 1, 2018

As written for Fargo, INC

Budgets, forecasts, & projections.

All essentially mean the same thing when it comes to looking forward with your business and its anticipated financial performance.  It’s a very common topic this time of year as many business owners look to plan out their expectations for the next year.  What’s not common, however, is the level of thought that goes into creating the plan & budget looking forward.

The first step in figuring out a budget is analyzing historical performance.  If you don’t do this on a monthly or quarterly basis throughout the year, you definitely want to take the time to do it during your budget process.  Pull out your year-end financials for the last 2 or 3 years and start looking at specific numbers and trends.

  • The Income Statement (also called the Profit & Loss Statement) shows your revenues/sales, cost of goods sold, expenses and net profit. Are your sales increasing or decreasing and do you know why?  Have you been able to improve your cost of goods sold?  How about individual expenses – what is trending up, what is trending down and why?  Is there anything that looks unusual compared to previous years?  What is your profit trend?
  • The Balance Sheet shows what you own & what you owe. Do you have more cash in the bank than last year or less?  Are accounts receivable more or less than last year?  Did you purchase more assets?  Did you increase your debt?  Were you able to book a net profit to increase your equity in the business?
  • The Cash Flow Statement shows cash in and cash out for the year. Were you able to fully fund business operations from normal business cash flow or did you require using an operating line to get through seasonal peaks & valleys?  Did you end the year with more cash than you started?

Once you see the actual numbers and trends, that gives you the basis for moving forward.  Based on where you are today, where do you want to go in the next year?  That is the question the starts the budget or forecasting process.  There are so many more things to dive into when analyzing the past and determining the future.  Here are just a few high-level items to get you thinking:

  1. Increasing sales. How are you going to increase sales?  New products or services?  How will they be priced?  More sales of existing products or services?  How will you accomplish that – more marketing?  Will it require additional staffing?
  2. Reducing COGS. Can you negotiate better prices with your suppliers?  Can you purchase at a better price from another vendor?  Are you able to gain direct labor efficiencies by purchasing equipment?
  3. Staffing needs & costs. Do you need more (or less) staff than currently? If so, how many people, working how many hours at what rate of pay?  Plus benefit costs & payroll taxes!
  4. Controlling expenses. Are any expenses going to increase for a specific reason?  Or are there any expenses that are too high that can be reduced.
  5. Capital purchases. Do you need any equipment, vehicles, furniture or event purchase of real estate?  How will you pay for it?
  6. Improving inventory turns. Are you sitting on too much inventory?  Can you reduce it an improve available cash by having less tied up in inventory?
  7. Reducing accounts receivable. Can you change your billing policies to get cash from accounts receivable sooner?  Are your receivables being monitored – perhaps you need someone to even just make calls or send reminders on past due invoices.

As you work through these considerations, decide what are the most important accomplishments in the next year and their impact on your business.  Pick a handful of objectives that you want to achieve for the year.  Then build the revenues & costs into your plan and go do it!

According to Benjamin Franklin: “Failing to plan, is planning to fail.”  While it’s rare that plans ever go exactly as planned, what’s important is charting your course.  If you don’t have a plan, you won’t know if you are doing as well as you could, or you are allowing your business to just happen and be controlled by others.  It’s okay to change your plans as you go and then of course, revised your budget and forecasts so you can see what the impact of those decisions will be.  You are in business to provide a product or service at a profit so that you can be rewarded for all your hard work.

If there’s anything that could even come close to showing you the future, your plan & budget are likely as close as it gets!