The goal of a budget is to create a plan to get the end-result you desire. So why not start with the end and go backward?
Here are five steps to create your backward budget:
Step 1. Define your desired net income. Add your desired business income to how much you need to reinvest to keep the business financially healthy. If that is too detailed – pick a number such as $100,000 or 10 times more than last year.
Step 2. IDENTIFY your fixed costs or overhead expenses. If you are already in business pull this information from your Income Statement or Profit and Loss statement. This includes the following types of expenses
- General and administrative – costs you incur to run a business such as insurance, telephone, office supplies, software, tax and accounting needs, etc.
- Occupancy – rent for space, utilities, property taxes, etc.
- Sales and marketing – sales commissions, website, dues, marketing materials, etc.
- Supplies or shop expenses – this depends on the type of business. These are costs you have but are not directly related to the sale. Such as shop supplies, uniforms, tools, fuel, etc.
- People costs – wages, benefits, employee taxes, retirement plan, health insurance plan, training, etc. Be sure to include a fair wage for you, the business owner.
Divide this by 360 and that’s your daily cost to be in business.
Step 3. Calculate what you need for gross profit by adding your overhead and desired net income.
NET INCOME + OVERHEAD COSTS = GROSS PROFIT
Step 4. Calculate options to generate the gross profit.
Start with identifying your revenue sources such as product sales, service sales, warranty income, etc. Create a list. You will want to know where your business income is coming from. Start with your history, if available.
For each revenue source, determine your direct costs on a percentage basis. If you are selling a product – what is the product cost and shipping you need to pay to earn that sale? If you are selling a service – what is the additional cost such as a subcontractor that you incur to earn that sale?
GROSS PROFIT = SALES – DIRECT COSTS
This GROSS PROFIT has to be equal or greater than the amount calculated in step 3 to achieve your desired results. This is where you need to be creative.
Step 5. Start working your sales and cost of sales to achieve the gross profit you need. Best place to start is where you are at now. Then sit back and evaluate the results. There are a few choices to improve your results –
- Reduce your overhead. Review your expenses – do you really need it?
- Change your product mix. Some sales have a lower cost than others do. Focus on those type of sales that have a greater gross profit.
- Start developing other revenue sources that have a lower cost. For product sales, include a warranty plan or a service agreement.
- Increase your size of sale. Have an addon, such as “do you want fries with that?”
- Raise your prices. Offer 3 options – good, better and best with the appropriate prices.
- Find more customers.
It is better to have the bad news before you live it. By creating a budget, you can take action to get better results.
At FOCUS CPA Inc. we can redesign your profit and loss statements to help you make better decisions. We also offer “strategy meetings” to find options to improve your results by focusing on your strengths. Give us a call, 920-351-4842 to set up your appointment.
By Mary Guldan-Lindstrom CPA