How to Build a Budget- and improve your profits

Create a really useful management tool using this ‘How To Build A Budget’

Definitions:
A Budget is an estimate of income and expenditure for a set period of time.  It is a Plan created to record, in financial terms, the goals and objectives you want to achieve in your business over a period.

Last week we covered off the first step of budgeting in our post How to Start a Budget… If you are an absolute first timer it will probably be helpful to go back and start there; but to summarise:

How to start a budget

1. Gather your Budgeting Calculating Ingredients
2. Write down your Future Plans
3. Sort out your Future Plans into Budget Headings

 

How to Build a budget

Now you have all the future plans listed in the budget headings it is time to get to the nuts-and-bolts…At about this point you may also want to move away from paper and start/open a spreadsheet – everything from here on in requires numbers and totals so many people find it is easier to fo use formulas than manual calculations. BUT if you want to continue your first draft on paper that is good too.

Draft up 13 more columns to the right of your heading – one for every month starting with next month and one as an annual total (the 12 months will add up to this) – and label them as you go.

4. Apply the dollars

Before we start adding the dollars check the list you have made and confirm you have included headings for all your regular expenses, as part of your future plans – the easiest way to do this is to look at your most recent income statement and verify every heading and line on your report is replicated on your budget heading list.

Income

Start with income, referring back to the Future Plans Worksheet use pricing and workload amounts and fill in a projected revenue amount for each of the next 12 months and the total. You can do this as a single revenue row, or split it into lots of rows for each of your products, clients, types of service – whatever will give a good amount of information to help you make profitable decisions.

If you are not sure of how to do this:

  • Assume the business will maintain much the same price as you had in the previous year with the addition of any activities you will undertake as new goals in the coming year; ie increase your volumes to include your planned products and services.
  • Tap into the internet for ideas of what revenue similar businesses might be generating.
  • Be realistic about the amount you can sell, base this in previous year’s income statement if you have one.

Often I will include a line for number of sales/volume as well as dollars/revenue, so I can see the number of sales and the income from sales in one place – this can also be kept as a Sales Sheet somewhere else – either way keep a record of both.

Add any extra revenue lines for non-sales items such as interest, rent, etc and create a TOTAL INCOME row that adds up everything above it.

Remember this is YOUR WORKING DOCUMENT don’t panic, you can change it later – 10,000 times or more if you need to!

Expenses

Similar to above, refer back to your Future Plans Worksheet and fill in a projected cost dollars along each expense row for the next 12 months and the total. There are two ways to approach this and either is fine (or use a mix of both)

a) Fill out everything in the total column first and then split up the timing of when that cost will occur into months (if you do it this way it is a good idea to add an extra formula column to ensure you split adds back to your initial total)
OR
b) Fill out your expenses in the months when you will pay each and then add them all up in your Total column

Sounds simple right? Yep, sure….!

How much will things cost???? This is the real “building” and finding the right amount can be tricky!

I start by colour coding the list into three cost types and then I ensure the spend pattern across the 12 months correctly matches the relevant type of cost.

Variable costs vary directly with changes to the production level eg each extra customer order requires 1 extra box and 1 extra stamp. These cost relate to your volume, so bearing in mind how much you intend to sell each month, calculate these costs across the listed expense headings of your budgets.

Fixed costs do not vary with the production level. Total fixed costs remain the same, within the relevant range, using last year’s reports and bills distinguish which are charged monthly and which are annually and also write these in your budget – making sure you put the annual amounts in the relevant monthly column. eg if you pay your building insurance monthly then allocate 1/12 to each column basing it on lat year’s bill but if you pay your Workers’s Compensation insurance every June put the full amount in the June column only.

Semi variable – some costs will show both sorts of patterns – the following are two common examples of mixed costs:

i) fixed to start then increasing evenly eg subscription fees – you pay $100 to join then a monthly amount of $20.
ii) stepped changes eg the first 1000 cost $10 each, 2000 – 9,999 will cost $9 each and more than 10,000 cost $7.50 – this can be particularly the case if you can produce a certain amount given you current staff costs, but if you go over that amount you need a new staff member, machinery and floor-space – so there is a related step-jump in the overall costs.

For completeness review your previous year’s Profit and Loss (Income Statement) for:

  • Sales last year
  • Expenses Last year

If you are a start-up gaining information about the revenues and expenses of similar business will provided the ingredients for this step – business associations are a good source of this.

for Aussie Budgeters

Always EXCLUDE GST in all your numbers for budgeting purposes
GST is a balance sheet transaction as you collect tax on behalf of the ATO and then pay the ATO that tax. In simple terms it isn’t your money so don’t worry about budgeting for it!

Keep your Budget and Forecasting clean and ignore balance sheet impacts at this stage (NB Taxes are a very important factor in cashflow projections so don’t forget it entirely).

Be realistic, so as you add in your costs and expenses for future plans keep checking it against what you have done previously. Focus on enabling the small steps of change tie them down to what you can realistically complete in the next 12 months.

At this stage capturing every possible cost in your budget, and get each dollar value as close as possible to what you expect.

 

5. Do a Profitability Check

So you have allocated costs to all your grand plans, and made some (hopefully) good sales projections. Ideally your budget will now be showing you tidy profit, but it may not be.

A useful budget is a working document, it will need reviews and adjustments. If at this stage it is negative revisit some of your future plans and adjust their scale and costs to ensure you stay in the black. Or if this budget is reflecting a big investment in the business, such as a spend on new equipment, or expansion to a new location – you may want to investigate borrowing to support this future goal.

If you have revisited all your future plans and are still in the red it is time to look at your overall profitability.

Profitibility

There are several ways you can improve your profits:

  • Change your Prices
  • Change your Volumes
  • Lower Direct Costs
  • Lower Indirect Costs
  • Reduce and eliminate Wastage

Pricing is tricky and a change in price needs to bring a benefit, not simply a loss of customers and orders. Check out both these earlier posts for more information on pricing strategies –
Pricing Products and Services
Maximising Selling Price

Review and Adjust the costs in your budget, being realistic to focus on how to run your business as cleanly as possible whilst still providing the same level of quality (or better still improving your quality). If you are really stuck, there are loads of people who can help you – your accountant, bookkeeper – or even a financially minded friend can all answer questions and assist in making your budget really robust – we will also happily offer initial free advice just contact us.

Once completed you can use this document as a tool to identify specific areas of focus for reducing unnecessary spend and increasing revenues.

Remember this is YOUR WORKING DOCUMENT don’t panic, and don’t EVER give up – best practice is to always be tweaking and improving the budget as you progress and more info comes to hand, or plans change.

There will be more on how to use your budget to really boost your profits next week!
 

Budget Template

This is a very simple excel template – there are hundreds of other versions available on the internet so feel free to create your own or use another – ( a good one will have some profit and margin calculations automatically built-in)

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2016-12-20T13:08:21+00:00