So you’re hurtling towards the end of another financial year. It’s been tough. You’ve had some great client wins, lost some clients, your team has changed and you may even be thinking about going in a different direction altogether.
You now need to look at the year ahead. It’s time to put a financial plan in place. So either with the help of your accountant or on your own, get a spreadsheet open (at MAP we’ve developed our own templates so if you’re interested to get in touch!) and you’re ready to start planning…
#1 Start with the 2 big numbers; revenue & profit
Most businesses will start preparing a budget by looking at the most predictable element, which is 99% of agencies is overhead costs. However, this can often limit the projected figures. So as a starting point, think about the annual revenue and profit you’d hope to achieve for the year ahead.
Once you have your 2 target numbers, plot out both month-by-month through the whole accounting year. Inevitably the performance will probably be ‘back-ended’ i.e. more revenue and profit in the later months of the accounting year.
You’ve now got a gap between your revenue and profit, which is your ‘allocation’ for both your cost of sales and overheads for the year.
#2 Get into the detail
Now you need to detail out your revenue, cost of sales and overheads. Create a tab for Revenue, a tab for Cost of Sales and then a tab for each Overhead ‘category’ within the agency (such as staff costs, office costs, legal & professional costs etc). Then plot out month by month your current numbers for each of these.
Once you’ve got the current numbers in, detail out what you believe/know will change in the coming 12 months.
For revenue, you may decide to plot this by client, team or service, but it should lead you to the overall target for the year.
For costs, add in any recruitment plans to the relevant month you plan to recruit, associated costs (such as recruitment fees), planned salary movements and any other changes in overhead costs.
You’ll likely then have a ‘balance’ needed to get your detailed revenue/costs to equal the top-line targets. This will be the ‘fat’ in your budget. For revenue, it’ll be the new business you don’t yet know about, and for costs, it’ll be increased budget lines to accommodate for the growth in revenue.
#3 Take a step back & question the numbers
Now you need to question whether the numbers are realistic. You need your budget to be achievable but not too ‘easy’ to achieve. You need to be asking yourself:
- Does the growth in revenue and profit look realistic against historic performance?
- Does the monthly performance fall in line with your forecast for the next 3 months?
- Are the revenue targets realistic? What would need to happen to ensure that they are hit?
- Are the profit margins realistic? Do they fall in line with agency standards?
- Could the team you’ve budgeted to deliver the revenue in the budget?
Once you’re happy that your budget is realistic but stretched enough to be challenging, you’re almost there.
#4 Sign it off and present to the team
Now you need to agree on the budget with the board. Once the board are agreed, you should then present the ‘top-level’ budget to the team. You don’t need to go into detail, just enough to give the team an idea of the plan for the coming year. This is especially important if you have a bonus scheme related to financial performance.
The final step is to get the budget uploaded to your accounting system prior to the new year starting so you can report on actual vs budgeted performance each month. Then repeat the process next year!
Not sure where to start? Book your discovery call here to find out how one of our FD’s can help you to build your budget.