Setting solid financial goals for the financial year ahead is an important part of your business planning and strategy.
Your financial budget should be an important foundation on which to base vital strategic decisions for your business. Given its importance, your budget needs to be sound yet also set realistic goals that engage and stretch your team to strive for.
Businesses generally grow or fail. Stagnating is a perilous middle ground, and one which is a real challenge for agencies to avoid in the ever-changing marketing and communications landscape.
There are some common areas where businesses miss the mark when setting their financial goals for a new financial year. Let’s run through them here to give your business some pointers on getting your budget right to lift your business strategy.
Here are five key elements to making your budget an effective management tool
Budget Mistake 1: Revenue goals should be realistic – not hopeful
Hope is not a strategy.
Don’t fall into the trap of setting revenue goals which you would love to achieve, but which in reality, you just cannot.
Nothing is more demotivating than falling short of your revenue goals before the new year has got going.
When you set revenue targets, do so with an eye on what you did last year, what your client’s marketing activity is likely to be, how your competitors are travelling, and also the general economic conditions.
Sure, build some stretch into your targets, but keep them realistic.
Budget mistake 2: Plan for investment – to stagnate is a mistake
To grow a business, you need to invest.
Decide which investments are most likely to deliver returns to your business, and consider how quickly you need those investments to deliver. Listed companies are often driven to deliver short term returns while privately owned companies often have the luxury of investing for the medium, or even long term.
Investments include strategic people hires, software platforms, or marketing your business.
It all about making solid business choices – you can’t have everything, so consider what will drive the most positive impact.
Budget mistake 3: Know your people costs ratio
These costs make or break your budget, and potentially your business.
Your people costs constitute between 50% and 70% of your revenue. This relationship, or metric, is your people cost ratio, also called the PC ratio.
A 50% PC ratio means you have a great agency.
70% means you will struggle to make a profit.
Monitor this continually, and adjust throughout the year. The smaller the business, the more difficult this ratio is to flex.
Make sure you include all people costs – including freelancers and superannuation – when you look at this ratio.
You can’t spend too much time monitoring this – this has to be the single biggest financial management focus (well, along with maximising revenue).
Budget mistake 4: Don’t spend more than 6-8% of revenue on office space
Businesses often gloss over what they perceive as the “fixed costs” in their business.
The biggest “fixed cost” in a business is occupancy costs. Typically, this cost can be around 10% of a business’s revenue.
When your lease comes up for renewal, or when there is a “break clause” in your lease, have a hard look at your office space needs.
· Do you need to be in a prime real estate spot?
· Can flexible work arrangements and hot desking reduce your space needs?
· Can your team spend more time at the client offices?
· Can you talk to your landlord about flexing your lease costs mid term?
You should be aiming at space of less than 10 square metres per person, and real estate costs of 6-8% of your revenue.
Budget mistake 5: Don’t set and forget – re-visit them each quarter
Your budget isn’t a set and forget exercise. It should be a living thing that you constantly revisit and reset – make sure you re-forecast either monthly, or as a minimum once a quarter.
The most common mistake we make in our budgeting process, is to set ourselves targets and then not to constantly monitor our progress against the budget.
We build a cost base to support the revenue we are striving to achieve.
But we may get halfway through the year, and then realise (or actually just come to accept) that we are not going to hit our budgeted revenue. But by then, it’s too late in the year to change our cost base to reflect revenue reality.
And the budget is blown for the year.
Be realistic about your progress against your budget, and make early decisions (sometimes not easy ones) to keep your cost base in line with the way you are travelling.