Running a business is easier if you have a budget. That includes budgeting the revenue you expect in the coming months and year. You need a revenue budget because without an idea of how much money you have coming in, you'll be clueless about how much you can afford to spend.
TL;DR (Too Long; Didn't Read)
Setting a revenue budget is less about calculation and more about judgment. Based on past sales performance and discussions with your sales team, you budget the sales revenue you expect in the next year. Then, you break that down into a month-by-month projection.
What Is Budgeted Revenue?
A revenue budget is a projection of your company's income over the coming year, ideally broken down month by month. The result on which you settle is your budgeted revenue for the year.
Budgeted revenue is not the same as profit. Whether you sell clothes, computers or landscaping services, the revenue budget looks at the total gross income your sales bring in. To estimate your net profit for the year, you have to subtract the cost of goods sold and your expenditure budget from the budgeted revenue.
Your budgeted revenue should include all your income from all sources. For most businesses, the heart of the revenue budget will be the sales budget.
Set Your Sales Budget
Most budgeted revenue comes from sales of something, whether it's goods or services. To draw up a revenue budget, you need an estimate of how much revenue your sales will bring in. There's no budgeted sales formula into which you can plug numbers to get an answer. It takes knowledge of your company and your market as well as good judgment.
If you've been in business for a couple of years, you can use your past performance as the basis for your sales budget. For example, if your sales revenue consistently runs $60,000 a year and nothing is changing in the coming 12 months, you can probably set budgeted revenue for the next year at $60,000. In other cases, it won't be so simple:
- You're just starting out as a business, so you don't have a sales history.
- Sales during your first year were $20,000, and the second year, sales went up to $30,000. Can you assume a similar increase next year, or have you maxed out?
- If you're introducing new product lines or expanding into new territory, you need to factor those elements into your budgeted revenue.
- If you're going to raise prices, that could increase revenue. Alternatively, if customers don't think your products are worth it, sales and revenue could drop.
- Have you eliminated past problems, such as replacing underperforming sales staff? That's another factor than can increase your revenue.
- Are there looming problems such as a recession or competitors with cheaper products?
- Do you have a plan to boost sales revenue in the coming year?
Your revenue budget can only be an estimate, but it has to be as accurate as possible. Going over past figures is the first step to budgeting revenue but not the last.
Talk to your sales manager and team. Get their sense of the market and the growth possibilities for the coming year. They have first-hand knowledge of whether customers are interested in buying more from you or are starting to favor your competitors.
If new products are on the way, talk to the team developing them. Get some idea of the release dates and confirm they're on track to meet them. Talk to your marketing director about promotions and what you can expect.
Budgeted Revenue by Month
Once you've gathered all the information, draw up your revenue budget. Don't just do this for the year as a whole; break it down month by month over the course of the year. This may be consistent, or it may be that you anticipate a big peak in the summer or winter.
Breaking down the figures is important because you don't want to wait 12 months to find out that your budget was off. If you check performance against monthly figures, you'll be able to sooner spot how close your budgeted revenue is to the reality. If your revenue falls short, you can figure out why there's a problem and correct it.
- Avoid the urge to under-budget revenues. Under-estimating revenues can cause a firm to slow down production and cause severe disruptions when the results are inaccurate. Aim to have a budget that is as accurate as possible.
Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs. His website is frasersherman.com