Budget planning is a complex process for small business owners. Today’s inflation rate and fluctuations in the market complicate the process even further. While the process requires some time, it is essential to managing your business. It allows you to understand your historical performance and establish a plan to meet your goals. Developing a budget will keep you on target with spending and sales goals. Here are a few items to consider while preparing your 2023 budget.
Spend Time Reviewing Your Past Performance
Business owners often review their finances monthly. Quarterly and annual reviews are sometimes lost in the shuffle as daily operations take precedence. It is easy to lose sight of the bigger picture of your business. Knowing what happened in the past can help you project your future needs. It is also the perfect opportunity to dig deep into the details of the financial aspect of your business. When developing a budget for the upcoming year, complete a review of your profit and loss statement for the past three years. Take notice of any trends or line items that were way off target. Answer some basic questions like:
- Do you need to adjust these in your budget for this year?
- Is there a reason why your spending was increased in a particular area?
- Why was the income increased or decreased?
- How will these impact your budget for 2023 and beyond?
Evaluate and Adjust Gross Profit Margin
So many small business owners lose track of their gross profit margin. Ideally, this is calculated based on a percentage point. There is a basic formula that you can use to calculate this number on each product or service that you sell. Take your net sales and subtract the cost for that item. Then divide that number by your net sales and multiply by 100. This will give you a percentage that you can use for planning purposes. This number will tell you how each line item performs in your budget. You can adjust your pricing structure or costs as you prepare for the 2023 budget.
Don’t Hesitate to Negotiate
You never get the answer you want to hear if you don’t ask the question. If you struggle to maintain a good profit margin because your costs are too high, ask to get them lowered. Some of your vendors are likely other small business owners. Have a conversation with them about their cost. Even a minor price reduction could allow you to realize a profit instead of a loss on a line item. Larger vendors may also offer some flexibility. You may need to order more of something or establish recurring ordering. Either of these options may help your operations and get you a deal simultaneously. Any cost reduction will be applied to your 2023 budget.
Think Into the Future
Making business projections are sort of like a fortune teller reading what will happen in your next life. There are so many variables that can change projections. Pandemics, inflation, and worker shortages are unplanned events that could drastically impact any projections made. Supply and demand could drive your business into a space you are not ready for. Even though there is a small level of hocus pocus that goes along with projecting the future of your business, it is a crucial step. Here are a few things that projections will help your business.
- Establishing sales goals
- Project cash flow for hiring and expansion purposes
- Determine any necessary loans
- Adjust spending habits
- Planning for contingencies
Develop a Plan to Follow
Once you have spent some time digging into the details (The Devil is Always in the Details,) now you need to put it all together into a plan. Your fixed costs are the easiest place to start pulling the plan together. Once you have that down, you will be in full swing of budget planning mode. Work on variable expenses next and then on to your sales projections. Don’t forget to add in a bucket of money for those unexpected things that might come up through the year. Having contingency money will have less of an impact if it is needed. If it is not needed, you can pay yourself extra or invest it back into the business for 2024.
Include Your Financial Professionals
Quarterly meetings with your accountant or bookkeeper will allow you to use the budget you have put so much work into. An outside review of the numbers will keep you on target for any goals. Their expertise can also guide you with recommendations for loan options or cost adjustments. Knowing any future tax implications will prevent you from digging into your contingency funds.
We are near the end of 2022. If you haven’t done a budget plan before or would like a review of your plan, contact Hayes & Associates. Their certified professionals will guide you in building a budget for your business and using that budget throughout the year.