By Simone Cimiluca-Radzins
As many business owners scramble to get their 2016 financials in shape as part of the annual tax and 280E process, very few are working on their 2017 budget. Just as we do in our personal life, setting our business goals and budget is key to our success. The budgeting process starts with strategic planning, which should be dynamic and reviewed on a continual basis.
“Knowing your numbers is a fundamental precept to business.” – Bill Gates
Strategic planning involves where you want your company to go and how you will get there. What sets your company or organization apart from the rest? Why is your product or service different? Great companies are always thinking both short-term and long-term strategy. As part of the yearly process, it is essential that executive management detail out the company’s annual plan. Will you be launching a new product or service line? Are there plans to open a new facility? Will there be a large marketing push or strategic alliance right before a major holiday?
An annual plan will allow you to set priorities, focus energy on key initiatives, and set key performance indicators for you organization.
Assess 2016 fiscal performance
The first step to setting your 2017 financial goals is assessing your prior year’s performance. Take a deep dive in the numbers, break out some pivot tables, run it through your favorite software, but here are the main objectives you will want to analyze:
- What was the best/worst selling month.
- Who were your top 10 customers
- How much did they contribute to your annual sales?
- Who was the best/worse customer in terms of sales, collections, customer service?
- What was the best-selling product/service? Why?
- What was the average sale per customer? How can you increase that amount?
- What were your top expenses categories and how can those be reduced or offer a better return?
- Did your expenses align with your revenue month over month? Did your expenses increase/decrease at a proportional rate to sales?
- What worked overall?
- What didn’t work overall?
Set a realistic target for growth and operating costs
After you’ve analyzed your 2016 numbers, it’s time to set your 2017 budgeted revenues, expenses, cash flow, and financial position. You will also want to define your expected growth rate. Defining your growth rate will depend on several things, such as your company’s stage of development, seeding, startup, growth, expansion, and maturity, as well as geography and regulatory environment. In 2015, the growth rate of the cannabis industry was 26 percent, according to ArcView group. Realistically, setting your 2017 goals at a market rate is a bit aggressive, but it is achievable.
After you’ve determined your 2017 annual target, you’ll need to trickle down goals into monthly revenues and expenditures. You can utilize your 2016 monthly performance as a starting point to set your monthly budgeting goals. For example, imagine your total sales in 2016 were $1,000,000, and your best-selling month was September, which accounted for 50 percent of your sales ($500,000). During your budgeting process you budget for an overall annual sales increase of 15 percent ($1,150,000). Therefore, a way to budget September sales could be 50 percent of total budgeted sales, or $575,000.
It is imperative that you use this approach for sales, cost of sales, and operating expenses. It is essential that all financial line items, including revenue, cost of sales, and marketing expenses be assigned to a department head to help leaders stay accountable.
Setting your yearly targets is a lengthy process; however, you can’t just evaluate your numbers once a year. Many organizations utilize continuous forecasting to reflect the constantly changing business environment and stay agile. Forecasting should be performed on a monthly basis as part of the financial reporting process. Forecasts need to be timely to allow enough time to make decisions. Forecasts should also be aligned with the strategic plans and goals of the organization.
It is imperative to routinely measure the quality and accuracy of forecasting. Successful forecasting will leave a very small variance between actual results and forecasted results. Like every good process, there should be an approval of the budgeting and forecasting process. If everyone is accountable for this process, then no one is accountable!
Starting 2017 Right
To implement a solid forecasting and budgeting process into your organization, the following steps should be taken:
- Involve all key stakeholders in the process. Include accounting, marketing, sales, and executive management.
- Design what the budgeting and forecasting process will be. How frequent are meetings? Who is accountable?
- Implement the process into the organization. Nothing happens overnight, so be aware that this process won’t be perfect the day you implement.
- Measure the results and reliability of the budgeting and forecasting process. Continually measure your variances between target and actual earnings and assess the reliability and accuracy of the actual process.
- Use the results to make business decisions.
- Learn and improve the process.
Earlier this month, I asked a group of more than 100 business owners if they used a budget to manage their business. 99% of the group admitted that they did not. A bit shocked, I told them, it’s okay. The beauty of accounting and budgeting is that you can always start today.