A budget is a key tool to assist in keeping a business on track with its goals, but often the budget can become meaningless when underlying assumptions are not met. For example, a movement in the foreign exchange rate could mean your budget is out of date before you get started. So how do you pull together a budget that is achievable ? Here are some key steps to follow:
- Prepare a ground up revenue forecast. Start with your sales funnel with volumes and conversion rates for new leads, lead qualification, customer conversion. Look at your sales history to come up with an average sale value. The key message is keep it simple and don’t overcomplicate the process. This will only make measuring your performance unnecessarily onerous
- Prepare your cost of sales. Look at your historical gross margin by product or service and use this as your baseline.
- Prepare a staffing budget. Look at your structure, what resources do you currently have and what will you be likely to need for the coming year
- Work out how you are going to achieve your sales leads and what it will cost.
- Other Costs – use your Profit and Loss Account as a base and consider anything that may change or that you will need, for example, have you got a lease renewal coming up ?
- Consider other factors that may impact, such as exchange rates, and make sure they are isolated from the underlying metrics so that performance can be measured independently of these external factors
- Review the results. You may need to review steps 1-6 above !
Once you have a line by line forecast then look at your structure and allocate responsibility for each line of your budget to someone in your organisation. Some lines, such as sales, may have more than one person so make sure you have constructed the metrics you have used so that can be easily split. These will become the key performance indicators you give to your team.
The final consideration is reporting and monitoring. Have a look at your financial systems and assess whether they can cater for measuring your results against budget. Spreadsheets can go a long way, but may not be the most efficient, especially if the business has grown to a size which warrant a more sophisticated financial reporting system.