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U.S. businesses as much as $100 billion each year. Discuss with your CPA
the best methods you can use to prevent fraud and embezzlement. I
found the following essential both for my own peace of mind and the
protection of my employees:


1. Mail should be opened immediately, and checks received
should be individually recorded by someone other than the

2. Checks should be stamped “For Deposit Only” and deposited
the same day received.

3. Purchase orders or other documentation must be required for
every check written. Approval requirements should be set de-
pending on the size of the check.

4. Bank statements must be reconciled monthly by someone out-
side the accounting department. At one time, I had statements
sent to my home instead of to the office.

5. The same person should not be buying inventory and receiv-
ing inventory.

6. It is always a red flag if accounting or purchasing employees
never take vacations. They can™t afford to have someone else
examine their files for a week or two because it might be dis-
covered that they have been stealing from the company.

In summary, budgets serve as defensive mechanisms against risk, alert-
ing the organization to problems lying ahead by building on the past. The
important thing is to stay in the game. If you have losses and let those
losses continue, you will eventually run out of cash. It usually happens
slowly”you have a line of credit that you have maxed out or can™t pay
back. You take longer and longer to pay your bills. You spend a greater
percentage of your time stalling creditors and looking for any source of
cash. Eventually, if this continues, you come up to a payday with too lit-
tle cash to meet payroll. That may be your last day in business. However,
Creating a Budget Everyone Can Use and Understand

budgeting lets you know in advance that you may have a shortfall. If you
budget, you will have plenty of opportunity to make changes in your op-
erations to avoid that situation altogether.

In addition, successful companies use their budgeting to identify spe-
cific, realistic, and quantifiable goals. Budgets bring order to the task of
pursuing those goals. First, you identify a revenue or sales objective for
the year. Then, identify the tasks necessary to reach that objective. That
done, explore the costs and budget for them, outlining the time and re-
sources you must commit to reach the goal. The budget quantifies your
plan in dollars. It also tells your managers and employees what you value
as an owner or manager.

Remember that you don™t win when bankers or customers allow you to
use their money. You win when you pay them off. For new businesses,
the first order of business is to pay off lenders. Particularly when you
consider that owners of new businesses generally sign personal guaran-
tees for bank loans, leases, and company credit cards, and in some cases
with their biggest suppliers in order to get the best credit terms. The
quickest way to get to financial stability is to identify basic financial fac-
tors and measure them, so that you can make midcourse corrections.
Here are some final tips for successful budgeting:

• Don™t keep your budgets and financial projections in a drawer.
Use them to chart the implementation of your strategies. There™s
no guarantee that careful budgeting and financial analysis will
bring the success you want, but without them, failure becomes
more likely.

• Scrutinize every potential risk that your business faces. That
means looking at”and sometimes looking beyond”the bottom


Now that we™ve covered the importance of a realistic budget and how to
control your budget, we turn to calculating your budget. The two compo-
nents to the budget, which are done separately and then put together, are
revenue (sales) and expenses (costs). Generally, you will do the revenue
budget first, using the sales unit quantity numbers as a base for both the
sales dollars and expenses.
42 Set High Standards

Revenue forecasts are much more difficult to determine with accuracy
than expense budgets. You might be successful forecasting an increase
in revenue as 20 percent from the prior year, but you lose the importance
of the process. Instead, look at trends in your business and outside your
business and take a hard look at what will be different this year. Do you
forecast a 20 percent increase in sales this year just because you think it
will look better if you do or because of a new product, an increasing
market, or an upswing in the economy? In addition, if possible, you
should base your revenue dollars forecast on expected units to be sold”
number of customers, transactions, renewal sales, products produced,
and type of product.

The easiest way to begin a projection is to map out at least one year”but
no more than three years”based on your performance over the same pe-
riod in the past. If you don™t have that much history, start with the pro-
jections you made in your business plan, adjusted to actual performance
since you opened for business.

Put expenses into categories (examples follow later in the chapter) that
make sense in your business. The most important thing is to define what
expenses you want in each of these categories so that you have some con-
sistency for comparing actual with budget and can accurately trend the
numbers over time.

Budget according to what actual expenses have been in the past, but be
proactive as well. Determine a reasonable amount to spend on office sup-
plies and budget accordingly. You can establish other benchmarks by
comparing your expenses with other companies in your industry. If you
belong to a trade group, find out how other members have done relative
to their projections. Have they come in over or under their projections?
Did they miss or exceed the mark by less than 5 percent”or by more
than 10? Try to find out how specific competitors have done. If all else
fails, find out how businesses in your region do in general.


Profits aren™t everything in business; in fact, your vision statement
probably says nothing about profits. However, without profits and their
conversion to cash, no business survives long enough to reach its goals.
Fittingly, therefore, almost everything in budgeting stems from the
Creating a Budget Everyone Can Use and Understand

simple formula for determining profit: revenue minus expenses. This
formula drives business. Profit ultimately defines performance, in other
words. Everything else is elaboration.


The following exercises will help you to create a bottom-up budget:

• Revenue budgeting.

• Expense budgeting.

• Budget notebook.

• Payroll projections.

• Income statement projections.

• Balance sheet projections.

• Break-even analysis.


Revenue budgeting is a series of steps to determine how much you are sell-
ing, in terms of units; how much each unit is bringing in, in terms of dol-
lars; and when to expect the dollars, in terms of time.

The four worksheets in this section are:

1. Average selling price per product.

2. Unit sales by product.

3. Dollar sales projections by product.

4. Dollar sales projections by month.

Even if your business is a service business rather than a product busi-
ness, you can do a modified form of this analysis. You can count by num-
ber of customers instead of units of products.
44 Set High Standards


To begin to project your sales for the year, it is essential to know how
much you are selling of each unit of product now. Worksheet 2.1 consid-
ers pricing issues across all product lines in detail. This is critical if you
discount your prices for volume or other criteria. You may think your
prices are close to retail, but the average price may be at a deeper dis-
count than you think.

This worksheet is useful in making pricing decisions. Some industries
have standard discounts and pricing schedules required by retailers
from wholesalers.

If you know you must make at least $10 per unit to be profitable and the
discount required by retailers is 50 percent, you must set your retail price
at $20 minimum.

The trend in average price per product may also give some important
signs about your business and your industry. If the average selling price
drops consistently from year to year (as, for example, with computer
software), you will have to become much more efficient in production to
remain profitable.

Worksheet 2.1 also gives you valuable information about what your cus-
tomers are willing to pay for your products. After calculating the average
selling price per product, compare this to what your largest customers
are paying. Are they buying far below this number? Are some of your
larger customers willing to buy at a number higher than this?

This approach to determining price per unit may be too basic for com-
panies with complex product lines (though the theory behind price per
unit measurement remains useful). It will work in many cases.

Making It Happen

To calculate average price per product, list your products in column A
and their total sales volume in column B of Worksheet 2.1. In column C,
list how many units were sold of each. In column D, list the selling price
for each unit of the product. To compute the average price per unit in col-
umn E, divide column B by column C. For F, the average discount from
Creating a Budget Everyone Can Use and Understand

Worksheet 2.1
This past year
Average Selling Price per Product
Two years ago

Total # of Selling Price Average Price % of Selling
Product $ Sales Units Sold $ per Unit $ per Unit (B/C) Price (E/D)
46 Set High Standards

the selling price, divide column E by column D. Complete this exercise
for at least two years™ worth of information.

Reality Check

Consider these questions about your completed worksheet:

• Has your average price per unit decreased or increased over the
past two years?

• How have your selling prices increased or decreased over the
same period of time?

• Are discounts”as a percentage”about the same over the past
two years or have they stayed the same? Do you have to give up a
larger percentage of total revenues over time?

• Is one customer large enough to be responsible for a sizable drop
in average price per product? Can your discounting policy be
changed to encourage purchase of higher margin?
Creating a Budget Everyone Can Use and Understand


It is important to begin any series of sales projections with what your ac-
tual unit sales were the previous year. Sales dollars may be increasing
year to year because of price increases, while unit volume may actually
be decreasing.

The number of things that you sell”regardless of price or terms”
reflects the underlying strength of your business. If unit sales aren™t in-
creasing, you aren™t growing in real terms.

Keep the actual numbers that come from these worksheets over time. All
products have life cycles. You will see which products have consistent
sales and which have increasing or decreasing sales. Generally, a hand-
ful of products have unit sales much greater than expected (although
dollar sales might be right on target or even below expectations). Most
have sales slightly below our usually optimistic projections.

Unit sales are a much better method of measuring real growth than
are dollar sales. Dollar sales can be impacted by price changes, additional
charges, and so on. Decreasing unit sales provide an early warning sig-
nal that can be addressed now rather than later”when dollar volume
sales begin to drop as well.

Making It Happen

List all the types of products you sold last year in the far left column of
Worksheet 2.2. Then tabulate the actual number of units you sold for
each type of product by month. Add the total units by product in the first
shaded column. In the last column, divide this number by 12 to get the
average unit sales by month.

Now do this worksheet a second time to project the number of units you
expect to sell this year. Project as conservatively as possible. If you do not
have a specific reason to expect an increase, use last year™s average num-
bers as a projection. In some products, you probably expect a decrease.
There may also be new products to add that you did not have last year.
Factor these differences into your projections.

You can also apply a percentage increase to the number of units sold
last year to get a projection for this year, although this tends to be less
Actuals Last Year
Worksheet 2.2
Projections for This Year
Unit Sales by Product
Actuals for This Year
Month Unit Sales Average Unit
Product 1 2 3 4 5 6 7 8 9 10 11 12 Year-to-Date Sales by Month*

*Divide total year-to-date unit sales by current month number.
Creating a Budget Everyone Can Use and Understand

accurate than estimating what you will sell month to month based on
marketing efforts. Finally, Worksheet 2.2 can be used to monitor how
close your actual unit sales are to your projections by adding the actual
numbers to a third blank worksheet.

Reality Check

Consider these questions about your completed worksheet:

• Are unit sales cyclical as evidenced by sharp increases in certain
months or seasons?

• Are unit increases due to particular marketing efforts?

• Are unit sales obviously affected by particular accounts™ buying

• Are new products doing as well as expected as soon as expected?

• Have any product sales dwindled during the year or from the past
50 Set High Standards


Worksheet 2.3 helps you project, conservatively, the dollar sales using unit
projections by product with an average selling price from the prior year.

It is important for the morale of the company to be aggressive in market-
ing and to have high expectations of the sales growth you want to
achieve. Save these high hopes for your sales meetings. The budgeting
process considers both sales and expenses. If you project a 20 percent in-
crease in sales for the purpose of determining your profit picture, you
may allow yourself to increase your expenses by more than you should.

While the company is busy looking at what it is spending, the sales and
marketing people must be busy looking also at what the expected sales
are. Take a very conservative approach to sales projections. Base them as
much as possible on what actually happened the prior year, both in
terms of real unit sales and your actual average selling prices. Factor in
any price increases and expected unit increases very carefully.

Remember, in virtually all but the most disciplined companies, if sales
are up, people ease up on the expense reins and the horse runs free. Al-
most all employees can find something they would like to have to im-
prove their lot. If money appears to be no object, people will ask for more
than they really need”including everything from office furniture to
computer software.

Making It Happen

Because the most realistic sales projections are done by looking not at
dollars, but at units sold, we begin with the unit sales number from the
previous worksheet (2.2). The number of units projected to be sold is
then multiplied by the average price received for the product last year to
get an idea of what sales dollars the product would be expected to bring
in this year.

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