Budgeting For Profitability: Optimize Your Revenue In All Economic Conditions
By Kyle Smith, CPA
I want to focus on how to use budgeting to optimize your business’s revenue to lead to more targeted growth and higher profits, even during flat or recessionary economic cycles.
Here are the 3 most important steps:
Find your best revenue channels:
This step is built on the concept of opportunity. Think critically about which revenue type is or feels “easiest,” meaning most unit-level profitable, sustainable, and scalable revenue. If you don’t have the data to see the most profitable revenue type, I strongly recommend consulting an accounting/financial expert such as Strata Cloud Accountants to help. In the meantime, as the most powerful expert in your business, think deeply about what revenue sources are most sustainable and can lead to the most significant long-term growth. In my opinion, there is no sense in focusing irreplaceable time and energy on generating revenue that will not facilitate long-term growth or adhere to your company’s mission. Be flexible and open to the fact that this revenue will change and evolve, but be uncompromising in your quest to focus on generating only profitable, sustainable, and scalable sales.
Build revenue flexible (Flex) budgets:
Another essential step in optimizing your revenue is to build at least two budgets with different targeted sales scenarios. For instance, you can have your base scenario be at a sales level that you know you can currently deliver, and another scenario at a stretch goal of 25% year over year growth.
Look critically at how these different scenarios affect Gross Margin and bottom-line profit. As an example layout, see the comparison Forecast that we use to analyze different sales scenarios with our clients. You can see “Best” vs. “Worst” vs. “Base” forecasts are compared side-by-side to see the impact at each line in the Profit & Loss Projection. You can also build two scenarios, one at your current sales mix and the second with a higher goal percentage of your most profitable revenue.
Once again, look critically at how selling more of your “easiest” revenue stream affects profitability. And if you’re looking to set your first base budget, we have other articles specific to setting up the nuts and bolts of budgeting on the stratacloudaccountants.com blog.
Use your budget to re-focus and adapt as your situation evolves:
The third step to optimize your revenue is to use your budget to measure against actuals and adapt when needed. The whole purpose of a budget is to drive conversations around building growth and profitability. Not hitting the budget should be viewed as a valuable opportunity to ask why: Was there unforeseen revenue that allowed you to beat projections? Was there unexpected competition that cut into expected revenues? Answering these types of questions then usually means revisiting the original forecasts and updating them as appropriate.
Once again, the goal is to most quickly identify the strategies that are working toward the company mission and growth and discard tactics that divert focus and cost profits. If you’re striving to leverage your budget by setting against actuals regularly, you can steer the business toward long-term success.