October has arrived, fellow business owners! And you know what that means… For many of us, it means it’s time to plan our holiday marketing. But we at Foray Business Group want to remind you that it’s also time for something else—planning next year’s budget.
And we’re not just talking about figuring out your expenses. Proper budgeting includes something else that’s just as crucial—setting goals.
You Need a Financial Vision
You need to understand the “why” behind each of your business goals if you want to reach them.
Let’s say you want your business to make $1 million in 2022. First ask yourself why you want that. Be honest with yourself here. Maybe you started your business to change lives. Or maybe you started it so you could break out of the 9-5, be there for all your kid’s soccer games, and attain financial freedom.
Whatever your motivation is, make sure you’re clear on it. Let it drive you to stick to your financial plan and press through when you hit a slow season.
Make 2 Kinds of Goals
It may seem strange, but next year’s budget should actually be two budgets.
The first is your ideal budget. For example, if your business is already making around $500,000 and you’re seeing strong demand for your products or services, then an ideal and aggressive growth goal might be making $1 million next year.
Now, it’s true that unexpected obstacles could arise or demand could start tapering off. Because of that, we now want to set a more realistic goal, perhaps making $700,000 next year.
Start With Your Goal and Work Backward
Once you figure out your why, you can take your goal and start deconstructing it to find out how much money you should allocate to each expense category.
Let’s say your small business is a year old and it’s already earning around $300,000 per year in revenue. You really want it to earn $600,000 next year (ideal goal) but would be happy with making $375,000 (realistic goal).
The next thing you should do is sit down and ask yourself, “What needs to happen for me to reach my ideal goal?”
Do you need to start advertising online? Do you need to hire an assistant or a bookkeeper? Do you need to streamline your systems? Ask the same questions for your realistic goal so you can create 2 separate budgets.
Time to Get Granular With Your Budgets
Next, calculate the costs involved in taking those steps and see how they fit into your current budget.
At the very least, your budget for next year must meet the current year’s performance.
A word of caution: Don’t be too optimistic when it comes to budgeting. It’s better to slightly overestimate your costs than to underestimate them. You don’t want surprise expenses to eat into your profit.
As you create your budget, you’ll find that some expenses are fixed. Hiring an assistant might cost you $40,000 per year. Outsourcing your bookkeeping could be $2,500 annually. Other necessities like insurance, mortgage or rent, dues and subscriptions, and website domains have set prices as well.
Other expenses can be calculated as a percentage of your gross revenue, such as taxes, merchant fees, and marketing. For instance, if your company makes less than $5 million per year, the U.S. Small Business Administration recommends allocating 7-8% of your yearly revenue to advertising and marketing.
Ruthlessly Cut Unnecessary Expenses
Now that you’ve created your budget with your ideal and realistic goals in mind, it’s time to go through them again and edit them.
Go through each expense with a critical eye and ask yourself if it truly is necessary to reach your goal. Right now, you’re trying to cut out all unnecessary expenses to pad your profit margin.
Do you really need that magazine subscription? Do you have to take your clients out to expensive restaurants? Do you actually need to hire three new employees or should you start with hiring two?
As you go through each expense, ask yourself if there’s a way to decrease it. Just because you’ve been using a specific vendor to stock your store for the last five years doesn’t mean you can’t switch now. Shop around for the best deal (without sacrificing quality) when it comes to products, insurance, merchant services, maintenance, equipment, cleaning, and so on.
Tip: Mortgage rates are still very low right now, so if you own the building, consider refinancing your mortgage. If you rent, negotiate with your landlord to see if they can lower your monthly price.
During this process, make sure you protect all the necessary expenses—everything you need to reach your goal. Let your why drive your budget, not fear.
Are you creating your budget for 2022 yet? What changes are you making to reach your goals? Comment below! We’d love to offer our support and advice.