If you grew up in the eastern half of the United States, your summer evenings probably involved catching fireflies. Because the bugs’ tails flicker on and off at night, a few seconds could pass before you would find out if your swoop of the jar was successful.
What does this have to do with budgeting for a consulting firm? It can often feel the same.
You can draft an annual budget, but depending on how a cycle develops, you might have to try another draft, and then another. This is one of those cycles. Here are a few tips to help you create the right budget for your firm.
Look at history for fluctuations.
Too often political consultants look at the bank account and think either: “I’m making money.” Or they ask, “Where’d all my money go?” This cash-balance approach to business is dangerous and unsustainable. You must have a written 12-month budget.
Start by looking at your revenue, costs of goods, and operating expenses over the past 24-to-36 months. Yes, you probably/hopefully made more in the even years. Now compare month-over-month growth (or contraction) and months during the time period (January 2014 to January 2015 to January 2016).
Put those Excel skills to use and chart all three key financial points – revenue, cost of goods (CoG), and expenses – to spot trends. This historical context will allow you to reasonably project baseline numbers for your budget.
Chart a course forward.
Using that data, fill in each line item in your budget for the next 12 months. Make sure you separate categories when possible. For example, don’t just have “income.” Split it up into the different streams of income you receive. If you’re a general consultant, that could be retainer fees, commissions, direct mail, et cetera.
Begin by only putting in numbers comparative to what has been historically possible. Look at the gross profit (after cost of goods) and net profit (after CoG and expenses) you will generate each month. A good target is 15-20 percent net profit. If you aren’t anywhere near these numbers, it’s time to put in some stretch goals.
The goal of owning a business is to generate a profit and to create more of it each month. Though this is more challenging with the cyclical nature of our business, it’s possible to project future growth so long as you put in the work required. Hopefully your new 12-month budget shows you growing 20 percent or more from the previous year or cycle.
Save for a rainy day.
While generating much more revenue six months out of every 24 months — the time around the primary and general election — presents challenges, it also creates opportunities. Any net profit generated above your budget should be put in a savings account. Yes, you’ll have to pay taxes on it if not used during a fiscal year, but there’s nothing more valuable in a business next to cash flow than cash in the bank.
The brightest investors buy when everyone else is selling. That’s only possible if you have cash on hand. You could hire a new employee, prepay your rent, invest in development of a new software. When you have a big ol’ bank balance, your options are plentiful.
Likewise, if you take out all that cash as distributions or dividends to you and your co-owners or investors, your firm is hamstrung when unique opportunities present themselves. Dave Ramsey, creator of EntreLeadership, recommends having a minimum of three-months of business expenses in the bank. Make that your first goal, and then use resources above it for strategic investments, like team, tools, and training.
The business of creating and executing is traditionally much more fun than the business of business. But we can’t ignore internal operations, and budgets are foundational to business health and growth. How can you hit a future target if you have not painted the red and white rings somewhere first?
As the late, great Zig Ziglar said, “If you aim at nothing, you will hit it every time.”
Brent Buchanan is a managing partner at Cygnal, a GOP communication, digital, and data/research firm.