Edition 72 – Does Your Year Have Less Than 12 Months
I believe in most family businesses, the activity of business is never a 12 month per annum revenue proposition. Does that sound weird? Let me explain.
Most family businesses don’t prepare budgets. For them, they see it as all too hard. They just open the doors every day, do what they do, then hope at the end of the year it is at least the same or better than the previous year.
Those that do prepare budgets, but don’t apply much attention to the process, simply amortising their annual revenue over 12 months.
Businesses have cycles. Some of them have multiple cycles during the year.
So, if your business does have a cycle or a series of cycles throughout the year, dividing an annual revenue number by the number of months during the year can be fatal. For example, if your business has a very busy period in the six months to Christmas and a very lean period in the following six months, amortising your annual budget evenly over 12 months will give you a false notion of what you need to achieve in the first half of the financial year to get yourself through the second half.
With that in mind, here are my tips for actively (and sensibly) budgeting your business:
- Work out what the cycles are in your business.
- Work out when you are generating business at full tilt during the year.
- Work out when business is quiet in the year.
- Apply a factor of 1 to each busy month and a factor of less than 1 for the quiet months.
To illustrate my point, here is an example.
Your business has an annual revenue target of $1 million.
If you have eight months of the year that are full tilt and four months that are, at best, half revenue months, you are really only working on a 10 month revenue model, not 12.
If you were to budget your business based purely on amortising the revenue over each month, your monthly revenue target would be $83 333 (i.e. $1 million divided by 12).
What you should be doing, however, is taking up each of your eight months of good revenue at 1/10th (10%) of your annual revenue target AND each of your four months of ordinary revenue at 1/20th (5%) of your annual revenue target. So, that is:
$1 million x 10% = $100 000
$100 000 x 8 months = $800 000
$1 million x 5% = $50 000
$50 000 x 4 months = $200 000
Total Revenue of $1 million
Over budgeting in slow trading months can kill the business.
Underbudgeting in busy trading months can give you a false sense of the business performance in the busy times and critically damage your cashflow’s ability to cover the slow periods.
None of this ever compensates for spending a single day drilling down deeply on budgeting each and every month. However, it is better than annual revenue divided by 12.
This Week’s Tip
Being lazy when setting your annual revenue budget might save you time at the front end, but will most definitely cause you grief in the back end.