Budget For Profit

Budgeting for Success

As the well known adage goes …. If you fail to plan, you might as well plan to fail!?

As difficult times like these, it is inconceivable that so many businesses still are not preparing detailed budgets to be agreed by their owners, managers and teams.

Planning a budget is relatively simple – it is the implementation that is harder – yet even the planning is not happening.

However, you might be surprised, but I advocate the following slightly different method of budgeting for the year ahead.

I believe to be successful, you must adopt the same methods used for strategic planning for any commercial business, i.e. using What, Why, How, Who, Where and When :-

First – What?  Decide WHAT PROFIT you would want to achieve for the year ahead – that figure should be the first figure that goes onto any budget – NOT the income generated by the business that usually gets entered.

Second = Why?  Be very clear why you have chosen that figure for profit – is it realistic, and will all the stakeholders be committed enough, wanting the profit hard enough, to make it happen?

Third – How?  Only once you are clear about your “what” and “why”, can you decide “how” you are going to make that desired profit come true.

This is fundamentally different to what most businesses (in my experience) do i.e. they normally list out their income and expenditure that they assume might happen, and then look to see what profit is left for them.

Psychologically, there is a big difference in the two methods – my way has been proven numerous times to work.  It helps businesses focus on what they have to do to achieve their desired profit – which after all, is why they should be doing the exercise each year.

Finally – The “who”, “where”, and “when” are merely subsets of “how” – so back to the “How”

HOW? – Having listed your desired profit, break that down into quarterly figures and then monthly; you should be willing and able to monitor the results that frequently.

Having done that, now summarise quarterly/monthly the totals under each relatively fixed “expense category” (e.g. wages, repairs, light and heat etc) that you expect to be incurring provided nothing unexpected happens in the year ahead.

Working backwards, by adding the figure for profit you hope to earn to the total of the expenses you think you are likely to incur, you now arrive at a figure for the “gross profit contribution” you need to generate to make that net profit happen.

This “profit contribution” will probably be generated from differing product ranges/types of service, and you need to take the trouble to divide this to show the different mix of margins you earn on each range, to arrive at the income required.

Having arrived at the required or forecast income that needs to be generated from existing product/service ranges, you can now identify any “unallocated balance of income” that needs to be generated from new sources of income, or increased income from existing sources.

Failing that, you will have to reduce some costs to achieve that all important profit figure.

Now decide “who” will help and be responsible “Where” and “When” for implementing the strategies to make the budget come true.

There’s your planned budget – now the harder bit – implement that plan and put in the necessary systems to monitor “actual” results/quarterly in each category, so that timely management decisions can be made to address any slippage.

This might all seem a trifle convoluted at first but, in my experience, once I have persuaded clients to think this way, it is a more effective method of making he budgeting/forecasting process more effective for a business that wants to be successful.

If you have a better way that works for you, please email me and let me know, and we can share it with our readers.

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