A short instructional talk by Bob Gauvreau on building financial forecasts and budgets by starting with end-year targets (revenue and profit), then breaking them down into monthly benchmarks. Emphasizes modeling gross profit vs. overhead, mapping revenue growth drivers, measuring actuals against budget/forecast, and adjusting drivers to stay on track.
Chapters
How can I budget or forecast or a combination of the two, my company's financial performance. And ultimately what we want to do is we want to start with the end game in mind. We want to understand what it is that we're trying to achieve in our business. So for example, for me, I usually start with my revenue and say, what is my intention this year? We're looking at a potential 20% growth this year. So when I take my actual numbers and I look at what I want to accomplish in my growth, I then start backing it out. And again, it's super important to understand what your financial model looks like. So when I look at my revenue, so let's call it $10 million, my $10 million, I need to understand the profit margin on that $10 million. And so let's say, for example, it's 50%. So 10 million, 50% cost of delivery is $5 million in profit. Now I might have $5 million in overhead costs, which could be my advertising, could be my office, admin or management team, insurance, rent, professional dues, dues and subscriptions. All those items are my overhead cost. So in my case, let's say it's $5 million. That would leave me budgeted to zero. And if I'm going to grow, what I want to understand is how these elements will transform. If I go from 10 million to 12 million, if I have a 50% gross profit, that would give me 6 million in gross profit. If I can maintain my $5 million in overhead cost, that would allow me to get to a million dollars in net income. You can see how that financial model works. If you're able to maintain your overhead costs and, and not let it creep up and you can increase your volume while maintaining your margins, it will allow you to demonstrate how financially successful you can be. Once I understand what that outcome is, I need to break it down monthly. And obviously by the end of the year we want to get to that 12 million, but we're not going to have that growth immediately. So we need to stagger that or we need to outline what our key objectives are that we need to achieve in order to get that growth. So in order to go from 10 million to 12 million, I need $2 million of revenue. What does that look like on an annual basis? Well, it's two. What does it look like on a monthly basis? We got to divide that by 12 months potentially, maybe. I know there's some key outcomes that are going to be triggered at the 6 month mark or the 12 month mark I start breaking that down so that I can see where my revenue is going to increase along the way, understand what's going to drive that, so that I can put that in part of my pathway to say I need to hit these benchmarks and these critical drivers in order to achieve those results. At the same token, as we're building out our monthly sort of projection budget, what we need to do is benchmark also our cost of goods sold. So if I go from, you know, $1 million a month, or maybe it's $900,000 a month with a 50% profit margin, that's 450, but maybe my overhead cost is 500amonth. I need to make sure that I'm breaking this down on a monthly basis with my 50% gross profit as I go from 900,000 all the way up to maybe 1.1 or 1.2 million in revenue, continuing to add employees, continuing to add extra costs associated with deliverables. But I need to map that out and tie that into those critical drivers so that I can know exactly what I need to do to get there. And in some instances, we want to try and push overhead costs down even lower. But we also have to be realistic to understand if we're going to go from a $900,000 to a $1.2 million a month company, we need to likely increase our overhead costs. Maybe some advertising needs to go up. Maybe we need to spend a little bit more on that side, generate more leads, get more meetings, close more deals. Maybe not. Maybe we need to identify referral partners, how we can, how we can bring them in, and those relationships in. They will help drive the revenue, keep our overhead costs down. So there's a few ways to look at it, but the key is to look at what you want to achieve at the end of the year and start breaking that down backwards to say, here's where we are now, this is where we want to get to. These are the critical elements that we have to introduce in our business, and these are the results that we're expecting along the way. The key part is, once we get this in place, we need to measure actual results to this budget, to this forecast, so that we can see if we're on track. Because you'll never be more on track to achieving that end goal than you are right now. But we have to take positive actions to achieve those small incremental wins and changes along the way to make sure we stay on path to achieving those goals. So track your regular results and see if you're on track. Otherwise, you need to change some of the critical drivers or the performance metrics to ensure you stay on track. So that's how you budget out where you're going to get to, and that's how you stay on track to achieving great financial outcomes.
