How can a budget get you to the Bahamas?
Jan. 18, 2011 at 5:04 p.m.
Updated Jan. 17, 2011 at 7:18 p.m.
The new year is here and many business owners dream of a more profitable year ahead.
So, what should you do be more successful this year? First, you should start with a budget.
Yes, I know I said the "B" word that everyone dreads. No one likes writing a budget, and then applying the restraint and determination to follow one.
While that's not any fun, I guarantee the most successful business owners not only have a budget, but use it on a weekly and monthly basis.
It should be used to guide you with the daily operational decisions you have to make.
The first step in making a budget is to drag out last year's numbers. This requires you to look at your income statements and balance sheets.
Yes, those papers that the accountant gives you on a monthly or quarterly basis are the ones the majority of you just file away. (At least that's what most clients tell me, as I cringe).
You should review your financial statements throughout the year to make sure you are in line with your budget. Think about your net profit last year and what you want it to be this year. How much money do you want to make this year ... bottom line?
Don't make the mistake of focusing on revenue here. Look at your "net profit" - or what you had left once everyone else was paid. Then, don't forget what you had left after you paid Uncle Sam.
Once you have a reasonable goal, then you can focus on how to reach that goal.
When reviewing your income statements, look at last year's expenses. How can you better manage your expenses this year? Look at both variable and fixed expenses.
Just because a "fixed cost" is fixed, doesn't mean there are no other options to obtain or incur that fixed cost - or that you can't negotiate better rates this year.
Your management skills come into play with variable costs. So, what can you do to lower these?
In addition, ask your employees for help with areas they know the business can save money on. They have been known to give some great advice because they are in the daily operations of your business.
Don't forget to look at your cost of goods sold. There is almost always an opportunity to better manage this category, which directly relates to your profitability.
In addition, don't be afraid to shop around for new suppliers or ask for better costs on merchandise and delivery.
Now, look at the top part of your income statement. How close or far do you need to be and can be from last year's revenues? Based on your net profit goal, what does your revenue have to be to meet that goal? Is it possible for you and your employees to generate that number?
Lastly, take a look at your balance sheet. What is your goal for inventory? How much should you carry this year to meet your new revenue goal and how much is too much to have on hand?
Inventory is your money just sitting on a shelf. Do you have more assets than liabilities? If not, do you have a plan to lower your liabilities and increase your assets? What can you do to end up with more owners' equity?
If you have dreams of selling your business one day and retiring to the Bahamas, the balance sheet and income statements have to be in good shape for you to be able to do so. That's where that wonderful budget comes into play. Think, Budget = Bahamas.
If you think you need help with planning your budget for a successful 2011, seek the help of a certified public accountant, financial advisor, friend in business or even the University of Houston-Victoria Small Business Development Center.
Here's to increased profits in 2011.
Lisa Barr is a senior business advisor with the University of Houston-Victoria Small Business Development Center.