912-234-8243 or nstein@hancockaskew.com
In my previous column we made a strong case for budgeting, mainly that:
• Failing to plan is planning to fail.
• It is a tough and competitive world out there.
• The business that opts for professional business practices makes its chances of success that much better.
• The process of budget preparation and implementation is one such practice.
• If we seek “excellence” in our business practice, budgeting is the way to go.
So how to do it?
Budgeting is one of those things that the more time and care you put into it, the more valuable the process — and it is a process.
There are two distinct phases:
• Preparation.
• Using, monitoring and adjusting your budget. It should be a living instrument.
Preparation
Two main areas of concern face the newcomer to the budgeting world:
• Projecting income.
• Determining the likely expenses that would be incurred in generating that income.
Income projection
The good news is we are considering only the next 12 months. The bad news is some businesses find it difficult to project tomorrow’s income – let alone in 10-12 months’ time.
However, we do have one truism:
The creator/owner must have had some idea of what business was out there and some expectation of income or they would not have started in the first place.
So there is a starting point. Let’s put those numbers down on a piece of paper. That’s a start.
Then let’s look at other things that may help our thinking:
• What have sales been like to date?
• If no track record, what are the sales like for similar enterprises, known in the realty game as comparables or industry averages. Also consider seasonality of sales, geographical considerations, trade magazines and similar businesses to help with your projections.
Let’s say our case study is a restaurant. Being a new business, we have no trend or idea of what our sales will be. However, a competitor down the street looks pretty much like what we have in mind.
We do some digging and find the following:
1. The competitor is in its fifth year of business and appears to be gaining in popularity.
2. Fifteen employees work for that restaurant during the peak tourist season, and it drops to 10 in the summer and winter.
3. The rent paid there is $4,000 (told by a friendly rental agent).
4. There are 80 chairs and 20 tables, and they seem to be full during the peak season and only about half during the off season.
5. Your neighbor who works for a food supply company run by his in-laws says this business spends an average of $12,000 monthly with his company and he guesses that would be about 70 percent of that business’s total food bill.
6. The average ticket is $35.00, and 40 percent of the wage staff are on salary and 60 percent on commissions (as told by disgruntled ex-employee).
7. The owner just traded for a brand new BMW with all the tricks.
We then go to the industry averages online and see that wages typically make up 30-35 percent of revenues, food cost can be around the same and rent normally is around 8 percent of revenues.
So without too much sleuthing, we can employ our eighth grade algebra to piece together our competitors’ revenues.
Using the wage information, we get to a total of $16,000 monthly in peak times and $12,000 in the off times.
If that represented around 30 percent of revenue, monthly income in the peak would be around $55,000 and in the quieter months around $41,000. In this case we can cross check this information with other pieces of information such as food costs, average ticket rates, tables, etc.
How does the rent logic work with those numbers? It seems to work out OK in peak times and a bit high during the quieter months
– to be expected.
So far our income skeleton from our sleuthing and some intuitive “smoothing” could look like this:
Jan.: $40K, Feb.: $50K,, March: $55K, April: $55K, May: $55K, June: $50K, July: $45K, Aug.: $40K, Sept.: $45K, Oct.: $50K, Nov.: $50K, Dec.:$45K.
Well, that was not too hard, and a start is better than no start, but what now?
Let us consider a barrage of harder revenue-related questions:
• How long will it take me to get there?
• What is the danger of me “flooding” the market?
• Does this market need one more (insert type here) Restaurant?
• What am I going to offer that will improve on those numbers of my competitor?
• What does my competitor have that I cannot offer?
• Locality being a huge consideration, am I going to be in the right place?
• How do I “reach” my target market? (Advertising) How quickly?
• How is the overall economy doing at this time?
• What are known impediments to my success?
These questions can often be more clearly seen by others. A great idea is to call together a group of friends whom you know to be savvy, street-smart, business-minded and aware of marketing trends to brainstorm these questions.
How to incorporate, prioritize and weight these factors? That’s the hard part. By using a combination of selected research, informal inquiry and consultation with other operatives and experts to help your thinking, you increase the odds of accurately projecting budgeted revenues.
By the way, as a separate exercise, you should try to sit down with other successful business owners in the field and quiz them on their experiences, wins, losses and revenue streams. Winning entrepreneurs are often more than happy to share their expertise and experiences with an aspiring new business owner.
In the end it comes down to intelligent guesswork.
The truth? Probably 90 percent of all businesses who have tried and failed, have not done their homework. So you are already ahead of the game in trying to be in the 10 percent who make it.
So we would tweak, adjust, moderate and modify these revenue numbers to try to model these other factors and come out with something we can realistically achieve.
That was the key part to the budgeting process
– and the one off which hangs a wealth of other related information — the expenses, and we will discuss those in the third and final part of this budgeting primer series.
Neville Stein is a partner with Hancock Askew & Co., LLPs. He can be reached at 912-234-8243 or nstein@hancockaskew.com.
This entry passed through the Full-Text RSS service — if this is your content and you’re reading it on someone else’s site, please read the FAQ at fivefilters.org/content-only/faq.php#publishers.
Source
The post Stein: A case for budgeting, part 2 – Business In Savannah appeared first on Allure Senses.