Have you detailed revenue sustaining targets?
|A.||Fingers crossed, we are hoping to survive.|
|B.||We’re pretty confident our existing customers will continue to do business with us.|
|C.||We try hard to hold on to our existing customers.|
|D.||We have identified some specific strategies to sustain current revenues, and retain existing customers.|
|E.||We have detailed sales & marketing strategies to sustain current revenues, and retain existing customers.|
|[Score: A=0, B=1, C=2, D=3 and E=4]|
Have you detailed revenue growth targets?
|A.||No, we’re just trying to keep afloat|
|B.||We are trying to broaden our portfolio, reach new customers, but have no specific targets.|
|C.||We are trying to reach new customers and have identified some new products / services / markets, but have no specific targets.|
|D.||We have summary revenue growth targets to expand our product and service portfolio, and reach new customers and markets.|
|E.||We have detailed current revenue growth targets to expand our product and service portfolio, and reach new customers and new markets.|
|[Score: A=0, B=1, C=2, D=3 and E=4]|
Why are these questions important?
‘Make new friends, but keep the old; those are silver, these are gold.’
These two aspects of customer relations are equally imperative to your success.
Revenue sustaining targets are all about keeping your old friends – delineating sales and marketing strategies that will both keep existing revenues and retain existing customers.
Revenue growth targets, on the other hand, are about making new friends – expanding your product and / or service offerings to acquire new customers and open up new markets.
Budgeting for Sustainability and Growth
Setting targets for sustainability and growth requires a healthy attitude toward budgeting. If you or your staff think of budgeting as merely a penny-pinching exercise you can’t possibly benefit from the process. On the other hand if you perceive budgeting as the vital tool it is for achieving your goals – the budgeting process can help you set and meet targets for both sustainability and growth.
It’s like the difference between going on a diet or eating healthily. One is negative and restrictive; the other is positive and focused on success.
A budget provides an educated estimate of future numbers based on what you currently know. It sets out the future of your business in numbers, giving crystal-clarity about sales, direct costs and overheads. As a forecasting tool, a budget should be prepared as early as possible prior to the start of the financial year.
As you prepare your budget, keep in mind that the key to sales success is fourfold:
- retaining existing customers …
- acquiring new customers …
- getting more of each customers’ spend …
- … at higher margins
Thus you should split the sales forecast to reflect:
- projected turnover from existing customers for existing products and services [sustaining]
- projected turnover from existing customers for new products and services [product/ service growth]
- projected turnover from new customers for existing products and services [customer growth]
- projected turnover from new customers for new products and services [product / service & customer growth]
Of course, at least as important as current sales figures and trends is a strategic means of looking into the future. StrategyPal’s Pipeline Tracker is your crystal ball; it helps you determine where future sales will be coming from and what their impact will be on your bottom line.
But a budget isn’t just about planning. It is also a powerful performance evaluation tool. Comparing actual results against the budget forecast provides you with valuable information about your performance.
To assist you in developing your budget for your business, you should review your entire business strategy and the processes and key assumptions that underlie each area of your business’ activities. Usually, the single most important input in your budget is your forecast for sales for the coming year – it is the key determinant for the rest of the budget forecast.
Some golden rules you should embrace:
- Set a timetable
- Go for clarity
- Involve everyone – that ensures commitment to the process
- Allow for contingencies
Examine the Horizon for the Coming Year
Examine the expected market for the coming year with current clients and contracts in mind. List any new business separately so that changes in current business are easier to track. Once you have determined your projected sales or revenues, examine what purchases and staffing levels are required in order to achieve these revenue levels.
- Are there any significant changes or emerging trends on the supply / purchasing side?
- Will you need additional (or fewer) staff?
- Will you need additional marketing spend, sales people?
Naturally, there will also be operating expense differences that you will need to examine. Are there likely to be any significant changes to your fixed costs in areas such as rent, travel, subsistence, insurances, telecommunications, office expenses, and internet and website costs? Are you likely to require additional support services?
Ask yourself and your staff these important questions as you are framing your budget:
- How can we improve our customer’s experience?
- Where can you do more with less?
- Are you setting targets that will set realistic challenges for all?
- Where are there likely to be ‘pressure points’?
Your Budgetary Control Process
A budget is a tool, not a static spreadsheet of figures, and tools are meant to be used. Once your budget is formulated, you need to put it to work, tracking performance and analysing the data the budget gives you.
Your budget control process begins when you articulate basic ideas about what you want to achieve in the coming year. You then prepare a budget to quantify and help you achieve those targets. But the process doesn’t stop there. As you achieve goals and progress through the year, you need to continually check to see if you’ve kept to the budget – that means every month.
Working your budget means monitoring your actual performance against your budgeted performance, and then analysing the reasons for any differences that arise. This process is referred to as ‘Variance Analysis’ – the process of answering these questions:
- if actual sales are down on your forecast levels – what are the underlying causes?
- if actual wages costs exceed your forecast levels – why has this happened?
Don’t let yourself get mired in detail. Just focus on these three main indicators:
- the reasons for differences between actual sales and your sales forecast
- the reasons for differences between actual direct costs and your direct costs forecast
- the reasons for differences between actual key overheads and your key overheads forecast
In all cases you need to determine the underlying reasons and examine the implications for the future of your business.
‘There’s too much month at the end of the money.’
The end of the month is the time to determine whether you fell in line with your planned expenditures. Here flexible budgets are helpful. This is a performance evaluation tool that adjusts the ‘static’ budget for the actual level of sales achieved. The flexible budget asks the question: “If I had known at the beginning of the period what my sales volume would be, what would my budget have looked like?”
Here, you input figures that are based on actual sales achieved. The motivation for the flexible budget is to compare apples with apples. For example, if you achieve 60% of projected turnover then your variable cost should also be 60% of projected, and other costs should be in line with the sales levels achieved.
If there is a significance difference in sales you need to establish the reasons and, where appropriate, take corrective action. Now you should adjust the budget to the sales level achieved – this is why we call it flexible budgeting – and identify the key variances. Although your budget analysis report – static or flexible – shows variances, it does not explain the reasons for the variances. The flexible budget gives you that perspective, so you can decide whether any action is needed and what that action should be.