The new year means another chance for financial growth. But to achieve any kind of growth, you need to budget. Particularly when it comes to operations.
The problem is, a lot of business owners shrug off operations budgeting as a pointless task. After all, operations constantly change, so why bother.
If you're such a business owner, you're making a massive financial mistake.
Operations budgeting is a key component to financial growth and success.
Don't believe me? Take a look at these five reasons why your 2015 plan should include operations budgeting...
*********** Best seller *************
Ten budget templates to forecast and manage your company's costs
You can use them individually or while you create your operating budget. You'll draw figures from these budgets so you can keep control of costs and maximise profit. Each budget chapter comes with a free Excel budget template for you to customise and use straight away.
Your 2015 plan must include an operations budget for these five reasons
You need to include an operations budget in your financial plan because:
1. It gives you greater control of your current operating expenses. This means you can plan for production better;
2. It helps break annual goals into monthly forecasts for profits and the operating expenses that come with achieving those results;
3. It gives you support for planning by identifying the resources you need and when you'll need them;
4. It helps you achieve accuracy when projecting future expenses that will almost certainly increase;
5. You'll be able to make financial decisions with confidence and ensure you're moving closer towards your goal.
So, as you can see, an operations budget isn't just a waste of time. Even if things in your operations change, you can still use your budget to control the change and manage the expenses.
Have I convinced you yet?
Or are you still thinking about how long it will take to draw up the budget?
If you are, then I have a surprise for you.
*********** Reader's choice ***************
Are you an accountant or bookkeeper? Don't let an Excel problem interrupt your workflow
Over 5 920 Excel questions are searched on Google in South Africa every month...
If you're adding to that statistic, you'll know how hard it is to find a solution that specifically relates to your Excel problem.
But not anymore!
You can draw up a complete operations budget in just nine easy steps
Step #1: Start with the previous year's figures
Ask your accountant for an income statement from the previous year. Insert these amounts into an Excel spreadsheet that matches the income statement.
Step #2: Forecast sales
Study your business high and low seasons. If you don't, you'll under- or over-budget for that period. This means you won't be able to cover costs or you'll over produce and sit with redundant stock. You can find a template to help you do this in the Master Budget Series
Step #3: Forecast your cost-of-sales
Forecast the cost of sales by using your previous year's figures. This forecast depends on your industry.
Step #4: Forecast your variable costs
Make sure you budget enough for labour and material. Calculate if you'll need to hire more workers this year if you project an increase in stock demand. Find out how to do this here
Step #5: Forecast fixed costs
Fixed costs are regular costs that don't vary with output.
Step #6: Determine profit/loss for the forecasted 12 months
Determine profit/loss for the next 12 months by deducting the cost of sales, variable costs and fixed costs from your total projected sales.
Step #7: Break your annual forecasted sales and costs goal into 12 monthly budget benchmarks
Now divide your forecasted 12-month operating budget into 12 separate months, assuming your income and expenses occur evenly during the year. If your business is more seasonal, you will have to adjust the individual months.
Step #8: Do this calculation for sales, cost of sales, variable costs and fixed costs as well
Step #9: Re-evaluate forecasts and monitor throughout the year
The benefit of this budget is you can regularly reevaluate your forecast and make adjustments if the net profit isn't what you expected. It's up to you to determine if your net profit forecast is fair for your business based on prior year's figures and events. That's why it's important to have an operations budget even if your operations change.
When it's this easy to create an operations budget and there are such good reasons to do so, why wouldn't you create one today?
PS. Operations budgets aren't the budget you need to do. There are nine more and the Master Budget Series
gives you complete templates to do them easily.