Understanding the Numbers Behind Your Budget

When most business owners hear the word “budgeting,” they cringe. Many times, the “budget” ends up collecting dust on some back room shelf, never to be seen again—until your accountant asks to see it. But your budget is more important than you think. It’s critical in helping you and your management team get the profit you want.

Everyone deals with a budget at some point in their life. If it’s important to you that your children go on to college, you’ll figure out a way to make your finances work. If it’s a vacation you really want, you’ll find a way to put money aside. When you have a goal in mind, you’re making intentional financial decisions to support that goal. That’s what’s really important: being intentional.

Budgeting in your business is the same thing. Start with the end in mind. If you really want that 15% Operating Profit Return on Revenue, craft a budget that will produce that result. Your budget doesn’t need to be complex or complicated, it simply needs to serve you and your business. Invest in a bookkeeping program if you don't already have one. We suggest QuickBooks.

Using a bookkeeping program will keep your budget and line items organized and give you the ability to easily categorize transactions and build reports. You’ll want your accountant nearby to make sure you have all your financial information accurately represented. With your program in place, you’ll find that assets like your income statement, budget and cash plan, will be more consistent and communicate more information about your business.

Start with your Profit and Loss and think about what it costs to actually make a sale. How much money are you spending to produce your product? What about the advertising expenses it took to get that sale? When you break down how much you’re spending to sell your product, you’re actually determining the Cost of Goods. You’ll also want to look at your Fixed Expenses, which are the expenses that don’t change each month.

The trick is not looking at the numbers at the end of each line item, but instead, looking at the percentage differences. For example, let’s say you made 10 sales in January, the next month you made 12 sales and the following month you made 15 sales. You might not think this is a notable difference, but when you take a look at the percentages, you’ll see that it’s actually a steady trend in your business. From there, you can take a closer look at your budget and craft it with intention. If you have a 5% steady increase in sales, what can you do to make it a 20% increase?

With that knowledge in mind, look at your previous budgets or bills. What can you expect for the future? Make a best guess on changes like:

  • subtle shifts in the market that may affect sales
  • new marketing campaigns you have planned to increase sales
  • productive changes in technology
  • operational adjustments to increase productivity and gross profit margins
  • fixed expense increases/decreases, etc.

This way, you’re creating a “forecast,” using the data you have from the past to monitor changes for the future. (Tip: Depending on your industry, you may want to take into account the seasonal nature of your business and adjust the budget accordingly.)

Recently, a client of mine decided to dig a little deeper and analyze his customer base. What he found were several “good” customers that were actually costing him money. He was amazed he hadn’t seen that previously. A customer is a customer, right? Not in this case. This analysis started with the budgeting process discussion and his search for ways to increase Gross Profit margins, which gave him a new perspective. He can now make adjustments that will result in higher margins, and tweak marketing efforts to focus more on profitable customers!

Crafting a meaningful budget is as much an art as it is a science. It takes massaging the numbers, playing with ideas, and always keeping your eye on where you want to take your business as articulated in your Vision Statement. But it’s worth it! It takes a willingness to search out and find the story in the numbers and to ask the tough questions:

  • What really affects my Gross Profit Margin?
  • What are possible action steps we can take in bumping up those margins? How can we increase productivity?
  • Am I attracting only the most profitable customers?
  • Am I settling for whoever happens in my front door?
  • How can I tweak my marketing so that my ideal customer comes running?
  • Who is accountable for reviewing fixed expenses? Do you have a system in place to regularly review these expenses?

And many more.

When you meet with your team, you won’t have to make a “resolution” to work harder and “hope” for a better year. Instead, you can use your budget to show how you’ll make changes. Your budget is a key piece of the “blueprints” for your business. When you ask the tough questions and understand there’s a bigger story to your finances, you’ll be able to clearly communicate what you want to your employees. You’ll even be able to use your budget to measure your monthly progress and track trends so you can make necessary adjustments.

It may take a little time and practice for you and your team to become skilled at deciphering those messages. But isn’t it worth finding the time in your busy day to finally take control of your profitability? And what’s the alternative?

Topics: Managing Money, Finance

Get a free coaching session. Schedule my session.
Rich Heidecker

Written by Rich Heidecker

Rich is a Certified EMyth Coach who is committed to making a meaningful and lasting impact in the small business community. He thoroughly enjoys working with small business owners to help them breakthrough their obstacles and finally become the owner they know they can be. In his free time, Rich enjoys the beach, running, and especially playing with his 2 1/2 year old granddaughter. Learn more about Rich.

See all of Rich's posts.