What if you did "Bottom Up" budgeting?
Many owners decide what revenues they want to generate each year and then discover what the profit is at those revenue levels. If they don't like the profits, then they increase the revenues. So, they actually are determining the profits they want in their heads and then adjusting the revenues to meet the profits.
What if you first decided what profit you wanted? Then determined the revenues that you needed to generate those profits? What if you started at the bottom of your profit and loss statement and worked up?
Here's how you do it:
1. Write down your company's profit seasonality. You might lose money in January, February, and March. You might earn great profits in June, July, and August. These are the percentages that you earn each month. And yes, there can be negative months. However, what if you had zero profit those months rather than a negative profit those months?
2. Once you know the percentages each month, determine the total profit dollars you want to generate. Multiply each month's percentage by the total dollars. Then you know the total dollars you will earn each month.
3. Determine your monthly overhead. Look at your actual monthly overhead, add the amount of salary increases, insurance increases, and other additions for, and you have your monthly overhead estimates for 2014.
4. Add the monthly net profit and overhead.
5. This gives you the monthly gross profit you must earn.
6. Look at your monthly gross margins. (Gross margin is gross profit divided by sales). These should be fairly consistent from month to month.
7. Divide your monthly budget gross profit by monthly gross margins. This is the revenue that you must generate each month.
Now, figure out how to generate that revenue!
I have a deep understanding of Profit and Loss Statements and Balance sheets - and I can explain them in simple, easy to understand language.
