Defining and achieving your ‘budget goals’
As businesses are currently setting their budgets (or should be soon) this is an excellent time to put some basic business budgeting theory into practice.
Whether you’re planning your budget for the next six months or full financial year, the specific framework remains the same. Instead of focusing on revenue targets, start with a straightforward approach that aligns your budgeting process with your ultimate goals.
This simple yet effective framework will set you on the path to achieving your financial objectives.
As we kick off another financial year, there are two main principles for your budgeting that will help you meet your profit goals.
Principle 1: Focus on the bottom line
The first principle is to determine what you want your bottom line to be at the end of the year. Don’t get bogged down with sales targets, staffing, or marketing details just yet. Ask yourself, "What is the profit I must achieve over the next 12 months?"
Set a specific profit target: Whether it’s $100,000, $500,000 or $2 million, having a clear, specific target is essential
Work backwards from the target: Once you’ve set your profit goal, plan everything else around achieving this number.
For example, if you aim for a $500,000 profit, identify all your overhead expenses for the year. Let’s say your overheads amount to $1.5 million. This means you need a gross profit of $2 million to cover your overheads and achieve your profit target.
Principle 2: Set a gross profit target
Gross profit, defined as revenue minus direct costs, is the second critical element. Determine how you can generate the required gross profit given your current resources and market conditions.
Assess overhead expenses: Calculate all overheads you’ll need to invest in for the year. In our example, this is $1.5 million
Target gross profit: To achieve a $500,000 profit with $1.5 million in overheads, you need a gross profit of $2 million.
Optimise Resource Utilisation
With a clear gross profit target, evaluate how you can generate the necessary revenue using your existing resources. Consider:
Product offerings: What products or services can you offer to maximise gross profit?
Selective clientele: Determine who your ideal customers are and be willing to say 'no' to any who don’t fit this profile.
High demand can lead to unrealistic expectations, making it essential to maintain a strong business positioning. For example, not everyone can afford a Louis Vuitton product, which is positioned at a premium price point. Similarly, your business needs to be selective about who you serve to maintain high gross profit levels.
Balance Capacity and Demand
Be strategic about your capacity and the demand you’re meeting. Saying ‘yes’ to every customer may keep your team busy, but it can compromise your profitability and distract you from your financial goals.
Maintain high GP levels: Ensure your offerings provide the highest possible gross profit
Capacity management: Balance your team's capacity with demand to maximise gross profit without overextending your resources.
Being selective and focusing on high-value customers ensures you can achieve the necessary gross profit to cover overheads and reach your profit goals.
By setting a clear bottom line and focusing on gross profit targets, you can strategically plan for the 2025 financial year. Remember to:
Set a specific profit target and plan backwards from it
Determine the required gross profit and optimise your resources to achieve it
Be selective about customers and maintain high gross profit levels
Balance capacity and demand to maximise profitability.
Implement these principles to ensure a successful and profitable financial year.
Elevate your business to new heights. Contact Nathan McGrath on 02 6686 3000 for an obligation-free discussion on how Collins Hume can help you achieve a better performing business and lifestyle.
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