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McLEAN AND CO.
THE START OF THE YEAR- AN IDEAL TIME TO SET YOUR GOALS AND BUDGETS
Whether you're mapping a path to profitability or simply determining how much to spend on marketing, setting effective budgets can help your business manage money optimally. Budgeting is a crucial aspect of financial planning. It forces you to ask questions about the business decisions you make, which in turn helps you anticipate the resources you'll need to reach your goals.
Use these tips to design budgets that keep your day-to-day operations focused on success.
1. Set Goals
Your spending priorities will be easier to identify if you begin the budgeting process with a clear set of goals and expectations. For example, you can streamline the development of a marketing budget if you're clear about what you want to achieve and what outreach tactics you expect to deploy. Similarly, if you're setting a budget for technology, it will be easier to pinpoint the amount you need to spend on staff training and tech support if you know your desired return on investment (ROI).
2. Get the Big Picture
It can be easy to underestimate the amount of money you'll need in different areas of your budget simply because you don't anticipate all the costs related to planned purchases. For example, if you're setting a budget for technology, include obvious expenses such as hardware and software, but also take into account "hidden" costs such as training, maintenance, and technical support. Many budgets are quickly thrown out of whack when these unanticipated expenses pop up.
3. Build in Increases
Some costs of doing business , such as salaries and wages, are likely to rise steadily over time. To make budgets as accurate as possible, these items should reflect expected annual changes. You can estimate the amount of these increases by reviewing cost of living forecasts, inflation rates, as well as your own historical spending trends.
4. Account for the Domino Effect
Spending changes in one area of business often impact others. For example, if you increase advertising spending, revenues may increase, but so will the amount you need to spend on customer service and fulfillment. As you hone your spending plans, be sure to reflect the impact of changes throughout each area of your budget.
5. Consider Losses
Every business will need to grapple with product returns, unpaid invoices, and other cash flow drains. Be sure to account for these losses in your budget.
6. Look at Industry Norms
You can use standard spending practices in your industry as a barometer for your budget. For example, if most businesses in your field spend 6 to 10 percent of revenues on advertising, this range is probably a good one for you to target. It's okay to vary from industry norms, but only with an understanding of how spending more or less than average will enable you to reach your goals. If you plan to double ad spending in your first year, document how the extra money will be spent and what the expected payback is.
7. Prepare for the Unexpected
Every business has unanticipated costs . Put a line item in your budget to cover these expenses.
8. Share it
Review your budget with an accountant or financial advisor. He or she can verify that you've effectively covered the budgeting basics, and serve as a sounding board for spending decisions.
9. Be Ready to Revise
Chances are the initial budgets you set won't be perfect. Update your forecast quarterly or when new information or events impact your company. Compare initial plans to what actually occurred, and adjust figures accordingly. For example, if you discover you're not meeting profitability, look for areas of the budget that can be cut. If sales are increasing, note which areas of your business will need to be enhanced to meet demand, and allocate more money to these areas.
GETTING BETTER VALUE FROM YOUR EXPENSES
If expenses are all higher than the averages, chances are the fundamental
problem is that prices are too low
If only some expenses are higher than the average, then action on only those specific costs is needed.
Increasing prices will make more revenue available without increasing the cost level, so the cost becomes a lower percentage
Look at the special features of the business, then make allowances for those:
• if your firm is heavily geared around mail order or phone sales, then those costs
should be higher
• if your firm has recently upgraded large amounts of equipment, then high
lease/depreciation should be expected
• if your firm has a lot of employees and few owners, wages expenses will probably
• if the firm is small, then some costs will be a high percentage, even though they may
not be large in dollar terms (e.g. a $2000 expenditure on advertising in a $100,000
turnover may be necessary, just to match expenditure in other competitive firms)
Focus not just on reducing expenses, but on getting better value from all your
client spends. This will almost certainly help you decide that some expenses aren't
Improved cost control comes from techniques such as:
• budget costs annually
• review costs against budget regularly
• ask whether each expenditure item is necessary?
• look for better or less-costly ways of operating the business
Most costs can be analysed by looking at three component parts
of the total: The Process; The Volume; and The Price. Each is looked at in
turn, to show how this approach will diagnose a problem.
The Process - looks at the underlying activity which creates the demand for the cost
• look at the flow of the product or the process - where does the material come from or go to?
• is there excess handling - too many 'pick ups' and 'put downs'?
• too many stops and starts?
• have you looked at whether it's better to do it 'in-house' or to sub-contract?
The Volume - looks at how much of the particular item you really need, compared to what you are presently using:
• is some of the volume 'wasted'
• is there any theft? Unauthorised private use? etc
• is the incoming purchase properly recorded and paid for? Otherwise, you might pay for items not received
• is the order or purchase of goods properly controlled, or can anyone spend money without proper review?
• is 'portion control' needed to standardise the amount of the service required?
The Price Paid - this lets you tighten the way goods or services are bought
• do you periodically put purchases out to competitive tender?
• are you buying goods of too high a quality relative to the use?
• can you benefit from bulk-purchase? Either by buying (eg) a year's supply, or by a co-operative order with a similar firm?
• are settlement discounts worthwhile?
The outline can be used to review most expenses - eg phone calls, or
insurances etc. It does not just apply to purchases of 'stock'.
In the case of (eg) high phone cost, it could be applied like this:
Process - review the way people use the phone - do they plan calls to outline what has to be accomplished in a call? Do they make repeat calls because all required info was not obtained in the first call?
Volume - is every call necessary? Are all calls business-related? Could email or fax get the same info at a lower cost?
Price - is it cheaper to use a mobile or a desk phone? Is the firm in a suitable 'plan' with the phone company? Is there a time during the day when it is cheaper to call?
How do I get better value from my …
Advertising and Promotion
Firstly, don't assume that more expenditure on advertising means 'better' advertising. Some low-cost ads or promotions can be very effective in generating new or repeat sales
Drop the campaigns or concepts that don't work! Try another approach.
Think about the 'referrers' you should regularly deal with...people who are in a position to influence customers' behaviour - e.g. real estate agents are a source of referrals for landscape gardeners, removalists, cleaners etc
How intensively do you 'farm' your current customer base - special deals, preview nights for new products, follow-up offers targeted at your known use of certain products or applications, etc
Can you add a new but related product to the current range? This creates scope to re-contact current customers or clients to advertise the new product, given your client's knowledge about their usage.
The best-value 'advertising' might well be this type of re-contact with current customers, rather than spending lots on advertising cost to get new customers. It's generally much cheaper to deal with current customers than to chase new customers.
Interest and Bank Charges
Build a positive relationship with your bank by providing accurate information, regularly.
Estimate your cash needs throughout the year so that the right finance facility can be put in place.
Periodically seek quotes from other financiers, to see that your banking package is still competitive.
Select a suitable mix of short-term and long-term debt in order to lower the overall interest cost.
Ask the bank for tips on reducing your fees.
Look at greater use of electronic transactions, rather than 'over the counter' transactions.
Sit down with your broker to assess exactly which types of cover you need. You should examine a list of packages that you consider to be a minimum cover.
Get the broker to check policy conditions (the most important part of the equation) and then the premium, in order to get a good value policy
Realistically assess the insured values, especially for: stock, debtors, equipment (watch whether the policy is for an 'agreed value', or 'new for old', as this will impact on the figure you will need to use).
Once you have gone through this review, make sure your assets are protected and protection has been bought at the 'right price'. Accordingly the total expense will be right no matter what % of turnover it represents!
Lease & Depreciation
Do you really need that piece of equipment? Can a similar piece of equipment be rented occasionally, rather than owned all the time?
Is the equipment of a suitable standard for your use (ie a cheaper piece of equipment might not last long enough or be reliable enough for the work you need it to do; or buying 'Rolls Royce' standard might be more than the business needs)
Have you shopped around to get the best possible purchase price and value-for-money? (this reduces your lease or depreciation cost)
Is there a large amount of equipment leased? Is all of the leasing handled by the same financier? Can this be refinanced to a cheaper rate elsewhere?
When comparing lease quotes do not just compare the interest rates. Look at the repayment amounts as well (some dealer fees are not required to be disclosed, but may be included in the repayment amount).
Are all costs business related?
Are you using the right vehicle to suit the business' needs?
Do you control costs through good driving habits
Are running expenses excessive? Are repair and maintenance costs high? Is replacement of the vehicle necessary?
How many vehicles are operated by and for the business? Is each necessary?
Repairs & Maintenance
Are 'high repair costs' typical of the way the business runs, or was there a high one-off expense this year?
If expenses are ongoing, is replacement a cheaper alternative in the long run?
Who is completing the repair work? can someone else do as good a job for less?
Is it worth establishing a contract with a preferred contractor for repair and maintenance work? Will they agree to a lower hourly/repair rate?
If your rent is high, is your location appropriate? Llook for factors such as: high passing trade (allows lower advertising cost); location in a Shopping Centre ('rent' might include a promotional levy paid by the Centre's tenants)
Rent can be reduced by: renegotiating rent per square metre (perhaps by referring to similar properties, or entering into a longer-term lease); sub-letting part of the premises, or to a firm needing some storage space, etc
Moving premises is worthwhile only if substantial savings are possible. Consider the total payback period, after comparing the cost of moving (pack up, removal, setup and fit out of new premises, change of stationery etc) with the rent to be saved.
See whether extended trading hours would increase overall sales and gross profit more than the cost of servicing those sales (this causes rent to remain constant and so become a lower percentage of income)
Perhaps you can negotiate a lower rent in return for paying for certain improvements to the presentation of the building itself (e.g. improved lighting, or new shop front windows etc)
When looking at this area, look at a combination of indicators: staff wages as % of turnover, revenue or gross profit per person; average salary per head.
The number of people can be kept to a minimum by balancing the available people to match the likely workload: more casuals/part-timers; have other jobs that staff can do (e.g. clean and tidy shelves; plan advertising, etc)
The number of people can also be kept to a minimum by having: minimum 'paperwork' necessary to keep proper control over the business; tight, efficient operating methods; well-trained people who know their roles and who don't need a lot of assistance
Some of these are governed by legislation (e.g. Holiday Pay, Sick Pay). Make sure your business is paying the required amount as a minimum.
Others are more discretionary - uniforms; training; superannuation etc. Make sure each expenditure is necessary for the long-term viability of the business. After that, satisfy yourself that higher payments are delivering a happier, more productive workforce.
Are travel costs excessive? Are all trips necessary for the business?
Could any of the costs be reasonably paid for by the employee? Could a maximum allowable expenditure budget (eg daily meal allowance) be placed on reasonable travel expenses?
Are there cheaper travel alternatives that could be used?
TAX RATES FOR TAXPAYERS
Different tax rates apply to different entities such as individuals and companies. These rates can also change if legislation changes. Click on the links to find respective tax rates.
Generally if you have more than one job, you should use a secondary tax code for all jobs other than your main job. In some cases if you used a secondary tax code you would be taxed at a rate that is too high for your circumstances. Instead you may qualify for a special tax code, which may reflect your circumstances more accurately.
A list of current income tax rates including and excluding earners' levy for individuals.
Find out about non-profit organisations, how they work, what the tax rates are and income tax exemptions.
In general the initial amount of money you put into a trust is not taxed, although you may need to pay gift duty. Find out more here about taxing trusts and trustees.
Your tax code is what decides how much tax is deducted from your income. The tax code that you will need to use depends on how many sources of income you have, and whether you have a student loan.
A sole trader is a person trading on their own. Find out here about how a sole trader works, what drawings are, and the tax rates for sole traders.
In a partnership, two or more people run a business together. Find out about how a partnership works, paying a salary to a partner, and more.
A company is a formal and legal entity in its own right, separate from its shareholders.
Here are links for the KiwiSaver website.
People who are interested in learning more about KiwiSaver and how it works can visit www.kiwisaver.govt.nz
Employers can find out how KiwiSaver will affect them in a new section on this website www.ird.govt.nz/kiwisaver/employers/
Potential KiwiSaver scheme providers who want to learn about becoming a scheme provider can find out more here www.ird.govt.nz/kiwisaver/providers/
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