Categories:Funding & Financials
December 18, 2013
As we talked about yesterday, figuring out how much revenue you’re expecting to make in the next year and calculating how much you’re going to spend is the cornerstone of a solid business budget. But how can you keep it from just feeling like you’re pulling numbers out of the air?
Projecting Your Revenue
For Existing Businesses
If your business is already up and running your life is a little easier as you, at least, have some historical data you can use to guide your projections. As you build your budget, refer back to your monthly sales for the prior year and determine whether you feel your sales will be the same, more than, or less than that.
Obviously your goal is to grow sales year over year, but you can’t simply take last year’s revenue figures and apply an X% increase to them. You may have had a month last year where your product received a press mention and that provided a temporary boost in sales or maybe you ran a promotion with your retailers and that brought in more revenue than normal. If you aren’t planning to do that same promotion in that same month this year and since you can’t count on press mentions, it’s better to look at each month separately and determine whether there was anything out of the ordinary that might have inflated sales that month. Also think about some of the marketing and promotions you have planned for the coming year and determine whether these will increase your sales and, if so, in what months.
For New Business Start Ups
Unfortunately, for those who are just starting their business, projecting revenue figures becomes a lot more murky but that still doesn’t mean it’s time to pull out the dart board and see where you land. Instead, give some thought to your distribution strategy and your production limits as those are usually the two biggest things that hold small businesses back in the first year or two. You may find, depending on the complexity of your product production, that you can only produce a certain amount of product (this is not at all uncommon for businesses that use seasonal ingredients in their products). In this case your greatest limiting factor in the short-term for revenue will be your production and so you can’t assume you’re going to sell 1000 units a month in your budget if, in reality, you can only product 500 units a month or can only make and sell those products during certain months in the year.
How and where you plan to sell your products is another piece that will help you come up with a decent idea of what your sales projections will be. Take into account how many people you believe will see your product based on all the ways you plan to distribute your products, be it at a farmers’ market or on store shelves. Then assume that a small percentage of that will actually purchase the product. So if you’re going to monthly festival that attracts 6000 people, you don’t necessary want to assume 6000 units in sales as well (determining how many of those people will purchase from you will partially depend on whether or not that audience is your target audience and would be interested in a product like yours and willing to spend money for it – all of this is part of your business strategy and planning). So let the limitations that you may face due to distribution also feed into your revenue figures.
Thankfully, expenses tend to be a lot easier to project. Once again, if you already have a business that’s operating you will want to revisit your monthly expenses from the past year and then take into account whether or not you see any of those increasing or decreasing. For those who haven’t yet started their small business, you should run through what you anticipate your expenses to be – everything from your phone bill to your marketing to the ingredients that go into your products. Remember though – the more products you sell the greater your product production expenses (also known as your Cost of Goods Sold) and other variable expenses will be and you want to make sure that’s reflected in your budget too.
Timing of Revenue and Expenses
As you complete your budget, you want to look at each month and see if there are times when expenses are outstripping revenue. Keep in mind, this is completely normal in a new or young business or even for those established businesses that experience seasonal fluctuations in sales. However, you need to make sure that during those lean months, you have the money on hand to pay your bills and have a plan in place on how you’re going to sustain and ultimately grow your business.
As a reminder, in the new year I will be hosting a multi-week online Business Planning Bootcamp seminar that will walk you through – among other things – how to develop a budget for your business. More information about this online class can be found here.