Start with Revenue Goals:
I cannot emphasize enough that the foundation of a strategic budget is a realistic and achievable growth target for your revenue.
Research and Analysis:
Start by looking at your revenue avenues and top performers.
Is the market saturated? If so, pricing may need to be adjusted.
Are new products necessary for continued growth?
Setting realistic targets also requires research and analysis beyond internal data.
Look at industry projections, economic forecasts, inflation trends, and other external factors that might influence your revenue.
The Small Business Administration has good statistics, your local Bureau of Business and Economic Research has economic reports, the Farmer's Almanac, and many more good resources that can help you decide what is appropriate for your industry.
Industry Examples:
Let's use farmers as an example. They consider weather forecasts because weather patterns significantly impact crop yields and revenue.
End users - businesses that rely on these crops (e.g., food manufacturers, biofuels, etc.) would also be watching the weather forecasts as they affect the price and availability of their raw materials.
Next, Analyze Expenses:
Separate expenses into fixed costs (rent, salaries) and variable costs (inventory, commissions). Analyze past spending data to understand historical spending patterns.
Detailed Expense Analysis:
Hard Costs (Long-Term Debts & Overhead): Identify these as the first expense category. While generally stable, exceptions exist (e.g., increased utility bills due to higher production volume).
Cost of Goods Sold (COGS): Consider how your sales strategy (volume increase vs. price increase) will impact COGS. Economic forecasts can help you anticipate inflation or recession risks that might affect COGS.
New Products: Factor in R&D and production costs for new products when budgeting. Use market research data to project realistic sales figures for new product launches.
Past Performance & ROI: Analyze past expenses and return on investment (ROI) to inform future budget allocations. Use this analysis, especially for marketing costs, to decide how to allocate resources in the coming budget.
Emergency Funds & Debt Repayment: Within the strategic budget, allocate a portion of your revenue to emergencies and debt repayment. The ideal percentages can vary depending on your company's financial situation.
Estimate Future Costs:
For variable costs, estimate future spending based on projected revenue growth. For fixed costs, see if there's room to cut back or negotiate better rates.
Build Your Budget: rinse and repeat as many times as it takes!
Subtract total expenses from projected revenue to see if there's a profit or loss. Refine your expense estimates or revenue projections to achieve a balanced budget.
Monitor and Adapt:
Track your actual spending against the budget and make adjustments throughout the year as needed. Being flexible will help your business adapt to unforeseen economic or industry changes.
Benefits of Strategic Budgeting
The benefits of setting research-based growth targets and budgets:
The research leads to more achievable and sustainable budgeting goals.
It helps identify potential risks and opportunities.
It provides a stronger foundation for strategic decision-making.
By following these steps and considering these additional factors, you can create a strategic budget that helps your business achieve its financial goals. Is there any trick or resource you feel is the key to your budget success? Share it with us in the comments.
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