Annual Budget Planning Process
- Begin budget planning 2-3 months before the financial year
- Review previous year’s actual performance
- Consider business growth targets and market conditions
- Factor in anticipated changes in costs and revenue
Revenue Projections
- Historical Analysis
- Review past 12-24 months of revenue trends. This can be difficult for new businesses. We recommend using conservative estimates and reviewing your budget every 3 months in the first year of operation.
- Account for seasonal variations
- Try to establish to relationship between marketing costs and revenue generation
- Consider confirmed contracts and recurring revenue
- Factor in potential client changes or market shifts
- Cost Structure Planning
- Fixed Costs
- Rent and utilities
- Insurance premiums
- Software subscriptions
- Regular maintenance
- Base employee wages
- Variable Costs
- Direct materials
- Marketing
- Commission-based payments
- Casual Labour
- Utilities that vary with production
- Owner Compensation Components
- Base salary allocation
- Performance-based adjustments
- Superannuation/retirement contributions
- Other benefits
- Fixed Costs
Creating the Budget Framework
- Monthly Allocation
- Break down annual projections into monthly targets
- Account for seasonal variations in revenue and expenses
- Include buffer for unexpected expenses
- Plan for tax payment timing
- Cash Flow Forecasting
- Project monthly cash inflows and outflows
- Include timing of major payments and receivables
- Factor in payment terms with suppliers and customers
- Monitor working capital requirements
- Don’t forget tax
- Set expenditure at a level that allows for the build up of you cash balance to equal at least 3 moths of total expenses including owner salary.
Owner Compensation Budget Considerations
- Fixed Component
- Set baseline monthly/fortnightly salary
- Include superannuation/retirement contributions
- Account for any fixed benefits or allowances
- Variable Component
- Define profit-sharing thresholds, these should be set after tax time or tax planning.
- Establish performance-based bonus criteria
- Set aside contingency funds
- Review and Adjustment Points
- Schedule quarterly budget reviews, especially in your first years.
- Define triggers for compensation adjustments
- Plan for annual compensation review
Monitoring and Control Measures
- Regular Review Schedule
- Weekly cash flow monitoring
- Analyse Marketing results
- Monthly budget vs actual comparison
- Quarterly performance assessment
- Annual comprehensive review
- Key Performance Indicators (KPIs)
- Gross profit margins
- Operating expense ratios
- Working capital adequacy
- Owner compensation as percentage of revenue
- Tax provision adequacy
- Adjustment Mechanisms
- Define circumstances for budget revisions
- Establish process for compensation adjustments
- Document decision-making criteria
- Set review and approval procedures
Documentation and Compliance
- Record Keeping
- Maintain detailed compensation records
- Document budget decisions and changes
- Track performance against KPIs
- Compliance Considerations
- Ensure alignment with tax obligations
- Always have at tax planning session with your accountant in April or May of each year.
Annual Review and Planning
- Year-End Analysis
- Compare actual results to budget
- Review your marketing plan
- Assess effectiveness of compensation structure
- Review working capital adequacy
- Evaluate tax planning effectiveness
- Next Year Planning
- Update compensation strategy based on learnings
- Adjust budget based on business growth
- Review and revise KPIs
- Set new targets and milestones
Remember that the budget should be a flexible document that guides decision-making while allowing for adjustments based on business performance and market conditions. Regular monitoring and review ensure that owner compensation remains sustainable and aligned with business objectives.
For more detailed help download our 6 Step Strategic Plan Guide here
