Turn Your Annual Operating Plan into a Budget
by JoAnne Berg
originally published by American Express OPEN Forum on February 18, 2011
If you are like many entrepreneurs, budgeting is an annual exercise that you may prefer to do without. However, your budget is a powerful tool for ensuring the success of your business, so it’s worth the time and effort to prepare one.
I’ve found that there is a different way of looking at the budgeting process that can help make it less painful while creating better results.
Your budget is essentially the numerical representation of your annual operating plan. So the trick is to create your annual plan first, then translate the written plan into a numerical budget. Some companies call this “profit planning” as opposed to budgeting.
Here are some tips for creating an annual plan and budget that will guide your business to enhanced profitability.
Always Start with Your Sales Plan for the Year
It’s not enough to just plan and budget your expenses. As any successful salesman will tell you, you also have to plan your sales!
Based upon what you know about your market, economic trends and other influences, make some realistic assumptions in terms of units sold, customers served and average sales prices for the next year. If you’ve been in business for a while, your historical numbers are a good starting point. If your business is newer, you’ll need to base this plan on your market research.
It’s important to plan in detail here. Don’t just set a dollar figure for total sales — it won’t give you the information you need to prepare the rest of your plan.
You will want to answer the following questions:
- What is your goal for total number of customers?
- What amount do you expect each customer will purchase of each of your products or services?
- What price will each customer pay?
You can then compute the expected sales dollars that the business will bring in when your sales goals are met.
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