It is that time of the year again! Right about the time the pumpkins come out and the turkeys are being shipped to the grocery stores should be a clue to you that it is time to build your annual MSP budget for next year. While some companies work on a different annual cycle, most would probably follow the calendar year for budgeting which means January is the first month of your annual cycle.
Budgeting: MSP Owner Types
There are three different types of MSP owners when it comes to budgeting. The first just does not do it. They are victims of their businesses ebbs and flows and accidentally grow or decline as the years go on. The second type is the one that builds a budget at the beginning of the year but fails to manage the business based on the budget they wrote. In this case the budget provides little guidance or assistance in growth. The last type is what you want to be. This MSP owner builds a budget based on previous years numbers and adds desired growth in areas such as revenue, gross margin and profit. Then works backwards to build goals that align with those numbers. This provides intentional growth and is the best way to own and grow a business.
How do you build a budget
Maybe you are not quite MSP owner number three from above and need a little help. Where do you start? How do you know what to include in your budget? How do you know how much growth to plan for and once you have put it in the budget, how do you make it happen?
The first place to start is last years numbers. Hopefully you are mature enough to have good accounting that can provide you with a profit and loss statement from the previous year. This is always the best place to start when building a budget. Build out a spreadsheet so that your left columns represent your income and expense accounts on your profit and loss and your other columns represent each month (Jan, Feb, etc.) It may be necessary to group some accounts together if your P&L is large so that you see what you are doing. For example, if you have a revenue account for selling hardware that is broken down into desktops, laptops, peripherals, etc, you may want to start with a row called hardware and built it out later into smaller pieces.
Take whatever numbers you did last year and average them across the 12 months. So if you did 120k in hardware last year, just add 10k to each monthly column so they add up to the total. Then work on the other revenue rows to accurately present what you did last year. This works the same for expenses. Be sure and eliminate any revenue or expenses that you know without a doubt will not reoccur in the upcoming year.
You may have received a large legal settlement or possibly had a big client that you lost. If you are certain the revenue or expense will not be there next year, don’t include it in the numbers. It is always a good idea to compare your budget at this point to your previous December (or last month you completed) numbers x 12. This helps to keep things comparable because if you took a big dip in monthly numbers in December, it could indicate a weak January or even first quarter.
Budgeting for Growth
Next you want to forecast growth. This should be a stretch but not a “big hairy audacious” goal. For a tip, look back at your business over the last few years and do the math to determine the amount of growth. If you grew by 3% per year for 3 years, it is unlikely you will increase that to 20%. Keep your industry standards in mind as well as your own limitations when setting this number. Once you know your growth number (revenue, gross margin, profit, etc.) add it to each revenue row you believe will grow by that amount. Keep in mind that it may be increasing more over time (compounding) so you may want to forecast lower growth numbers earlier in the year with heavier percentages later in the year. (Intuit Quickbooks budgeting tool in their desktop product works will for this task!)
Now that you have your growth numbers, do the same for your expenses. Try to forecast how expenses will change over time and make sure your budget represents the forecast. This is a good time to think about how you can cut expenses for the coming year.
Wrap it up
Now that your budget is complete, make a list of goals for the year that will help you achieve those growth numbers. If you increased your revenue budget by 10%, make a list of items you will complete to make that happen. It won’t happen without your intention to make it happen; you need a plan! If you seek to raise gross margins, figure out how much you need to adjust and plan to lower costs or increase pricing. Be intentional!
Only by building a budget and managing your business to the budget weekly (or at least monthly) can you ever hope to achieve growth and scalability. Being able to predict what is happening in your business or about to happen in your business gives you the ability to adjust when you need to do so. Only the best businesses master this skill.
If you are new to the game or just need a little help, feel free to reach out to RedVine Operations and we can give you some guidance. We are here to help!