Know Your Numbers

This last quarter you’ve taken the time to dream and do some goal-setting. You envision your future both with family and business. The next step, and the most important for business success, is to get started on your numbers, which means creating a budget for the next year and a forecast for the following year. Your budget is your business plan reflected in numbers and serves as your essential tool in measuring progress and, eventually, success.
I’ve encountered several businesses where numbers perplex the owner. They operate their business daily, wondering if there will be enough sales to make payroll or cover vendor or facility costs. They are stressed over finances and often wonder if they have or will have enough money to invest in new hires, capacity expansion, technology platforms, marketing, or even their salary. They use a line of credit to borrow against when cash is tight and imprudently spend when money is flush. The origin of this stress is uncertainty. They have no budget, and the lack of financial planning and discipline creates this uncertainty.
Budgeting is an essential discipline in a business. Whether you’re a sole proprietor or leading a company of fifty or more, knowing your numbers and forecasting cash flow ensures success. I encourage companies to start the budgeting process no later than the end of their third fiscal quarter. If you’re a company overseen by a board of directors, begin the process in the second quarter.
The first step in the process is to evaluate your current sales, cost of goods sold, and operating expenses and confidently affirm what these numbers will be in the next year. Essentially, you’re establishing a baseline by evaluating the past and projecting with knowledge what next year’s sales, cost of goods sold, and operating expenses will be without introducing any sales growth or cost-cutting strategies.
Next, monetize those dreams interpreted into goals that you developed with your team these past months. Break the goals into strategies and make assumptions for each scenario, whether revenue generating or cost cutting, on the impact it will have on the top, revenue, and bottom, profit lines in the business. Do this month by month and calculate the end-of-year totals by discrete revenue and cost elements. Once you go through this process and are satisfied with your profit number, lock your budget in for the year. You have more work to do if you’re unhappy with the budgeted profit. You must continue developing revenue-generating and cost-cutting strategies that get you to the profit number you seek.
Monthly, review your profit and loss statements against your budget. Inspire your staff to exceed sales goals and stay within or below budgeted costs. Quarterly, deep dive into trends, and adjust your annual budget accordingly. Extend these numbers into the next fiscal year, and you’ve created a forecast and a financial roadmap to achieve the profit goals you seek.