A ‘Blue Sky’ budget is one that includes a factor for growth. This is a great idea… however where it often falls down, is in calculating everything else that enables the business’ ability to create and handle the growth.
For example if you’re going to grow sales by say 20%, how much more marketing do you need to do? How much more sales capability do you need to deal with the extra leads from the marketing? How much more overheads will you need to deliver the extra sales?
What we often see is extra overheads factored into a budget, allowing for the extra sales. The big danger with this is, what happens if the sales don’t materialise? We see the overheads spent, without the extra sales… causing losses.
So what can you do to make sure your ‘Blue Sky’ Budget stacks up and you don’t end up with losses?
- Factor in extra leads and sales conversions to a ‘Marketing & Sales Plan’ to create the extra sales.
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- Extra sales don’t just happen by ‘magic’. They come from marketing and sales efforts. If you want to increase sales by 20%, that probably means you need to target an extra 40% in leads coming into your business. Why double the extra sales? It would be quite unusual for a business to convert 100% of leads coming in. Let’s say you have a sales conversion rate of 50%, this means if you want to create an extra 20% in sales you need to create an extra 40% in leads coming in.
- If you know which marketing efforts create the best quality and quantity of leads, you need to factor in a plan to achieve those leads. Once the plan is set you need KPIs (Key Performance Indicators) to ensure it’s on track. You need to target a certain number of leads each day, week or month, to ensure there will be enough sales opportunities to achieve your desired sales figures.
- What’s your current sales process? Are there ways you can improve this to increase the sales conversion rate? If you can achieve an improvement here, it could save you extra marketing spend in order to achieve the extra sales. It may be that you need to invest some funds in setting up the improved sales process initially, but it will pay big dividends down the track.
- Factor in extra marketing and sales costs to create the extra sales. If you need to create extra leads to increase sales, you need to know what the leads cost you to get. If you don’t keep a good record of where your leads are coming from, now is a good time to start. The aim is to get maximum leads for minimum cost. You need to know how much each lead cost you to get from various sources and what were the sales conversion from each i.e. quality of leads. When you know this, you can factor in the cost of acquiring the extra leads to achieve your targeted sales figure.
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- Monitor the extra Sales achieved and Gross Margin carefully
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- Be disciplined with pricing. One of the great temptations when targeting extra sales is to start reducing prices when the budgeted sales don’t happen. This is not necessarily a bad thing but any margin erosion through reduced prices either needs to be offset by a reduction in the cost of the sales or a reduction in the associated overheads. Otherwise you risk ending up “buying” revenue with no increase in profits.
- Don’t be afraid to modify your plans if you either undershoot or overshoot your sales budgets substantially. There is no shame in attempting to increase sales and not succeeding, as long as the right corrective action around costs follows. Conversely, if the sales increase is much greater than budgeted be prepared to spend the additional overheads required to support that growth or the team may buckle under the additional pressure of managing without the correct resources. Right sizing the support structure to the actual level of sales is crucial.
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- Make overheads variable as much as possible
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- Overheads are often ‘bumped up’ in line with extra sales targets. A problem arises when the sales don’t materialise to cover the extra overheads. If you can manage extra overheads to be as variable as possible this helps. For example, don’t lock yourself into extra premises or staff immediately… grow them gradually in line with sales growth. Use ‘pop up’ premises on a short term basis if possible, take on casual or short term contract staff, to meet resource needs until you’re confident the extra sales are permanent.
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- Cash Flow Forecast to handle growth
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- Many businesses fall into the trap of thinking extra sales will fix all issues. We often get asked the question “How come my sales are up but cash is still tight?” This is a typical scenario. What happens when you make a sale is that you often have to buy stuff before you’ve sold it e.g. labour and materials. It takes time for the sale to be finalised e.g. a project or stock that sits around in store for a while. You’ve had to pay for the labour and materials, often before you’ve sold them. Then, if you give payment terms to customers, you have to wait to be paid. All of this creates cash flow squeeze, if you aren’t getting up front deposits or progress payments. It follows then if you need cash to fund sales… the more sales you make, the more cash you need. If this isn’t factored into growth plans, it can cause lots of headaches. Doing a detailed Cash Flow Forecast will highlight how much extra cash you will need and you can deal with it upfront, rather than waiting until it’s a problem.
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- Budget reviews to monitor progress closely
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- Setting a budget is a great start to achieving extra sales and profit. What we often see though is the budget gets set, it’s then shoved in the drawer or filed away and forgotten about. A budget is like a ‘financial roadmap’ to your desired destination of profitability. You need to regularly check it’s on track. The best way to do this is to enter it into your accounting system, then report monthly on the budget versus actual progress. If it’s on track… great! If it’s off track you need to ask yourself why and do what needs to be done to get it back on track. Doing it this way avoids a big surprise at the end of the next financial year, being losses you hadn’t anticipated.
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Setting solid targets and systems for tracking them is the only way to achieve your desired outcome of better profitability. There’s an old saying:
“If you aim at nothing you will meet the target with amazing accuracy!”
For more information to help with successful budgeting – download your complimentary ‘Top Budget Tip Sheet’
