
It’s almost November–budget season. It’s time to get your budget process started. It’s time to formalize your plan for 2016.
It’s also good time reflect, review and re-focus before you actually start crunching numbers.
So to start, I do a quick exercise with my business owner clients.
- Reflect: We take a look back to where they were five years ago (2010).
- Review: We look at the transformation (or not) from 2010 to now and review where things stand right NOW.
- Refocus: We look at where they want to be five years from now, and tighten our focus on those goals.
The look back is important to appreciate where we are. The lessons are, yes, painful at times, but are good for us developing as individuals and successful business owners. The look forward primes us to seize what is ahead and make it count.
This exercise helps us develop goals to move toward the five year vision. We look at sales and marketing, operations, profitability, working capital, EBITDA, and lifestyle. This helps clarify the vision. It’s a simple, but very effective exercise. This helps us activate our brain’s reticulate activating system to do the right things to move toward that five year vision.
Now, comes the nuts-and-bolts part–doing the budget.
As you start forming your 2016 budget, use the following as a guide with the idea of having the budget finalized by the end of November.
- Sales Budget: The overall company budget starts with the Sales budget. Look at customers sales and gross profit history. Work with your sales team in a synergistic way to develop what is possible for your business. Look at your current customers. Set targets for new customers. Look at your current segments–are there any new segments for 2016? Put your customer data into a size/profitability matrix. If possible consider fully absorbed gross margin (i.e. some customers use more operating expenses than others). Consider allocating variable operating expenses to your cost of goods sold by customers. Understand your average transaction size, and number of transactions per customer. Fact: Super-successful companies focus on sales growth more so than expense reduction. Make that your focus too. What are your planned sales by segment by month for 2016? What are your gross margins by month?
- Production Budget: This depends on what type of business you’re running. The production plan must be able to support the sales plan. For example: do you need to adjust shipping schedules? Is production driving revenue or is revenue driving production? Focus on lean, smooth, and efficient processes.
- Personnel Plan: Plan your your organization chart with salary dollars. Here’s a Personnel Plan you can use.
- Operating Expenses: Look at your trailing 12 months-by-month to see any seasonality or sales relationships. Forecast each line item by month and document the assumptions in a summary of significant assumptions document.
- Interest Expense: Calculate planned debt usage. Ensure all debt on your balance sheet ties out to an amortization schedule. Plan to meet with your bankers to improve your borrowing capacity.
- Depreciation: Plan your capital expenditure budget. What fixed assets are you buying, when, and how (lease/buy, cash/finance). Use your fixed asset register to forecast your current depreciation for 2016 and use 20% of planned fixed asset additions.
- Cash Flow: Can you make improvements in your DSO or Inventory Turnover to improve cash flow? Your forecasted balance sheet will be driven from your cash flow drivers.
- Calendar Your Quarterly Accountability: I use a Year-at-a-Glance Calendar and schedule everything: holidays, important dates, vacations, quarterly meetings, etc. It’s a good idea to get this drafted now.
A step-by-step budgeting process preceded by a “Reflect, Review, Refocus” exercise can help you tackle this sometimes intimidating but very necessary project in preparation for the new year. If you need help, contact me!