With 2012 winding down, it would be easy to sit back and breathe in a sigh of relief that there will be a brief period of decreased workload until Spring.
A profitable business knows, nothing could be further from the truth! Put away that napping pillow and keep that alarm clock set to your usual wakeup time! Now is the time to begin planning for 2013! I’m not just talking about planning, but planning for increased Profits.
And here’s the good news! I’ve developed a simple guide divided into 4 bite-size manageable parts to help you focus on the areas that will provide the greatest impact to your bottom line. No matter if your bottom line ended up in the negative or positive (I hope the latter!), planning and implementing the plan and methods in this series will insure improved performance and profits.
Profit & Loss Statement Budgeting
In the past you may have struggled with where to begin your planning process, but not this year - we’ll begin with the Profit & Loss Statement, of course! Almost everyone follows their P&L during the course of the year on a monthly, semi-annual, or yearly basis. My suggestion is for your business to plan on utilizing a monthly basis review.
The easiest way to begin your 2013 P&L planning is to allow your accounting software to develop an Accrual (recording an expense when it actually occurred) monthly budget based on your 2013 Revenue goals and past expense history. This projected budget will only be a starting point and will give you show your expenses calculated as a percentage of your Revenues. Edit this projection line item by line item from Cost of Goods Sold down through Wage & Wage Benefits as accurately as possible. At this point, add in any new monthly expenses you expect to incur, and you have your draft P&L budget for 2013.
Not happy with the year-end Profit result? This is the time to go back and realistically change those monthly expenses you feel you can control further in order to reach your Profit goal. Realistically is the key word here, in that any budget based on unattainable projections is not worth beginning the year with. It has to be a budget plan you feel you can reach.
Once you’ve taken a look at your P&L and committed to improving your planning and profits, continue on to the Cash Flow budgeting, after all, this is the next logical step in the process.
Cash Flow budgeting
While many Owners and Managers tend to shy away from this one due to lack of familiarity, it is actually very simple. A Cash Flow budget is just a P&L projection that reflects Cash (recording an Expense or Revenue when money actually changed hands) only items. We’ve wisely set our original P&L projection to be Accrual. Using the P&L projection and omit Accrual entries and insert Cash ones and you will have at your disposal a Cash Flow Statement. Sounds complicated, but it really isn’t.
There are two reasons I consider a Cash Flow projection a necessary management tool. One, it points out the month/season of greatest cash need in the form of Line of Credit. Second, it is peace of mind. If you know beforehand what you will need to borrow (and repay), both you and your lender will sleep better at night, or at least until that early alarm rings.
Planning for 2013 should also mean planning for increased Wealth. Most Owners do not plan for Wealth for two reasons – they do not want to give an impression they are in business just for the money and they don’t really know what a Balance Sheet really means and how to apply it to their business.
Don’t be put off by the Balance Sheet. It’s nothing more than the inflow of Cash from the P&L together with a listing of other Assets (property, machinery, equipment, etc.) vs. Liabilities (money owed). The net difference between what you own in the form of Assets and what you owe in Liabilities is Equity, or Wealth.
Tracking Equity on a historical basis, and then projecting the same is the best indicator of how effectively you are generating Wealth from your business activities. If your Equity is increasing, you are managing your Assets well. If your Equity is decreasing, your Liabilities are increasing at a faster pace than your Assets, meaning even more scrutiny is needed.
One last area of budgeting that is vitally important to a Retailer – the amount of inventory to purchase as well as how much to have on hand. The resulting Cost of Goods Sold can be over 50% of your total expenses for the year making this the lowest-hanging fruit, ripe for decreasing, resulting in increased Profits.
There are a multitude of factors that go into budgeting for inventory. Past history in Attained Margin, Margin and Sales Goals, seasonality of departments, and more all need to be addressed in order to arrive at the right level. You can either do this yourself, or subscribe to a budgeting program such as the $eason2Buy™ Inventory Management and Budgeting System online the beginning of January.
One thing to remember – budgets are not set in stone. Your budgets should be set up so that you, your accounting software, your Excel spreadsheets, or budgeting software can overwrite the monthly budgeted amount with actual dollars. Doing so will give you revised Year-to-Date results at the end of each future month, and more accurate projections of how the year is trending vs. waiting until year-end to accept the outcome. Be proactive in your small business management.
Budgets won’t happen unless you make them happen. If you need assistance, contact me or a trusted financial advisor such as your accountant or lender. Knowing where you are going is just as important as where you have been.
I use an acronym to explain what we have outlined here– PIMA. Plan, Implement, Measure, and Adjust . . . Plan, Implement, Measure, and Adjust . . . Plan, Implement, Measure, and Adjust. It’s a never-ending process.
Here’s to a Profitable and Prosperous 2013!!!
Financial Analysis Consultant