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It is also important to factor in any price increases, but be very conserva-
tive in doing so. If you increase your selling price by 10 percent, often
you don™t increase your discounted price to high volume purchasers by
an equal amount. In this case, you might want to factor in only a 5 per-
cent increase in the average price.
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Creating a Budget Everyone Can Use and Understand



Worksheet 2.3
Dollar Sales Projections by Product
A B* C** D
Unit Sales Average Price Projected Price Projected $ Sales
Product by Product per Product Increases (%) (B/C/D)




*From Unit Sales by Product Worksheet.
**From Average Price per Product Worksheet.
52 Set High Standards



To get a total, multiply columns B, C, and D of Worksheet 2.3. The
shaded box at the bottom should be your total expected dollar sales for
the entire year.



Reality Check

Consider these questions about completed Worksheet 2.3:

• Have you reviewed profitability and market factors to consider
price increases?

• Are projected sales substantially greater or less than actual sales
from last year?

• Are sales projections particularly aggressive for some products
and not for others? Do these differences accurately reflect the po-
sitions of various products in their sales cycles?

• Are there other significant sources of income not taken into ac-
count by product sales (i.e., shipping and handling)?

• Is there any other information, such as the possible loss of a major
customer, that needs to be factored into sales projections?
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Creating a Budget Everyone Can Use and Understand



DOLLAR SALES PROJECTIONS BY MONTH

Worksheet 2.4 takes the dollar sales projections developed on the prior
worksheet and allocates them by month by looking at sales by month
during the prior year. It is important to know when we expect the sales
to be booked. For most companies, sales are recorded on shipment of the
company™s product.

Filling in Worksheet 2.4 with your actual sales figures from the previous
year will allow you to see if any of your products are seasonal. Even if
sales of your products generally don™t appear to have any dramatic fluc-
tuations from month to month, certain products will. This may signal a
particular buying segment that orders at a particular time of year. Know-
ing this may help you spend your marketing dollars for this buying
group at the right time.



Making It Happen

For the purpose of accurate projections, it is important to do Worksheet 2.4
twice.

First, use actual numbers from the last full year to get the percentages that
are calculated at the bottom of the page. These numbers show what per-
centage of the total sales was made each month of the previous 12 months.
The total in the box at the bottom right should be 100 percent.

List your products in the left-hand column. List actual dollar sales by
product for each of the past 12 months. Total the numbers, month by
month, at the bottom of the page. Using these total dollar figures, divide
the total dollars by month by the total dollars in the shaded box at the bot-
tom right corner. Enter these percentages by month at the bottom of each
column.

For your second calculation, use the totals and percentages you just calcu-
lated at the bottom of the first Dollar Sales Projections by Product Work-
sheet (2.3) to make sales projections. This time, enter the total dollars by
product that you calculated in the previous worksheet (from Dollar Sales
Projections by Product [2.3]) in the far right column, and total at the bot-
tom. Next, enter the percentages by month at the bottom of the page from
the percentages done on the worksheet showing the actual numbers from
last year. Multiply the number in the total column by the percentage at the
54
Actuals Last Year
Worksheet 2.4
Projections This Year
Dollar Sales Projections by Month
Month
Product 1 2 3 4 5 6 7 8 9 10 11 12 Total*




Product $ $ $ $ $ $ $ $ $ $ $ $ $
% by Month % % % % % % % % % % % % 100%
* From Dollar Sales Projections by Product worksheet for this year only.
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Creating a Budget Everyone Can Use and Understand



bottom to get a number to fill in each box. This will give you an expected
dollar sales volume by month.

Illustrating this data graphically (a simple bar chart works well) will in-
crease its impact.



Reality Check

Consider these questions about your completed worksheet:

• What effect does seasonality have on sales and cash flow?

• How do debt service and other major financial commitments co-
incide with or run counter to the annual sales cycle? How will
this affect your cash flow?

• Will profit margin decrease substantially because of variable
costs coming into play during certain times of the year?

• Can marketing efforts be adjusted to smooth out erratic cyclical
and seasonal sales patterns?

• Will you require a line of credit or some other borrowing mecha-
nism if cash flow isn™t adequate to meet expenses during certain
times of the year? Is that borrowing mechanism ready?



EXPENSE BUDGETING

I™m convinced that there is only one way to start to review your ex-
penses and project your sales: from the bottom up and in writing. Many
companies project expenses by increasing each expense item by a regu-
lar annual percentage or budget as a percentage of sales. In contrast, a
bottom-up method forces you essentially to start over each year.

This allows more flexibility to do things such as reducing expenses.
When you carefully analyze the checks you write, you may find you™re
paying for things you aren™t using, especially for ongoing commitments
such as maintenance agreements. An annual review is essential.

In preparing for your annual review, it goes without saying that the
number-crunching part of the budgeting process can and should be done
by computer, but spreadsheets are only a part of a budget. The “whys” for
56 Set High Standards



the numbers are often contained in peripheral documents such as leases
or supplier purchase agreements. To understand the budget completely,
you should house the spreadsheets and copies of relevant documents to-
gether. Putting the interim and final product in a notebook allows for
easy access and discussion at meetings and for reference during the year,
and it makes a much more accessible and complete document for em-
ployees. It also allows an obvious place for note taking to prepare for the
next year™s budget process.

Spreadsheets can be set up by department on a computer network, giving
each manager a password for access to his or her department™s section
only. These sections can automatically be added to the total company
worksheet so that changes will total immediately.


THE BUDGET NOTEBOOK

Our company created a budget notebook each year that documented
every expense item, including which suppliers we had used and gen-
eral ledger numbers to correctly categorize each expense. The impor-
tance of complete documentation in your budgeting process cannot be
overemphasized:

• First, the budgeting exercise in this book makes you really analyze
your sales projections and expenses in detail. It doesn™t allow you
to pass over any item.

• Second, it tells your accounting department how you want items
categorized for reporting purposes. You may wonder why rents are
so high on your reports. It may be because accounting thinks you
want equipment rents expense reported here, while you think ac-
counting allocates this expense to repairs and maintenance. With
documentation, everyone is clear on which expense goes where.

• Third, it will convince your employees, like nothing else, that you
mean business about really scrutinizing what is being spent.

Done well, the budget notebook can be the one place to find all the an-
swers. You can keep copies of contracts in this notebook to show expense
commitments you have made for periods beyond the current year. Last,
this kind of notebook helps employees understand how the company™s
money is being spent. Employees sometimes overestimate”signifi-
cantly”how much the owner or manager takes out of a business. They
assume that if you take in $3 million in revenue, the owner is taking
57
Creating a Budget Everyone Can Use and Understand



home $2 million. The notebook shows them how much money it takes
to make payroll, pay insurance premiums, pay rent, and so on.

Set up your notebook in a three-ring binder. Prepare the dividers and
have one blank sheet of paper for each item with its title on the top. To
begin writing, start with the easiest items first, usually some recurring,
consistent expenses. For example, how much do you pay in rent each
month? Add to this any information you need about your lease, such as
the starting and ending dates, and when increases occur. This is a good
time to review your lease and look for any hidden costs that will need to
be a part of your budget.

Each line item has several general ledger account numbers associated
with it. These general ledger numbers are used by your accounting staff
to allocate every item for which the company writes checks. By looking
at each of the expenditures in each general ledger account number, you
can do budgeting from the bottom up. Ask your accounting department
to add your general ledger numbers to the right side of this sheet.

Try to use the “miscellaneous” line item as little as possible. I never
budget for anything other than petty cash in this category so it will not
become a catchall for items accounting cannot otherwise categorize.

The budget notebook starts with sales projections, which we focused on
in the last few worksheets. Your sales divider should be followed by the
completed Average Selling Price Per Product Worksheet (2.1), the Unit
Sales by Product Worksheet (2.2), the Dollar Sales Projections by Product
(2.3), and by Month worksheets (2.4). These will give you a system to cal-
culate conservative expectations of sales by which you can realistically
budget expenses.

We had four other sections that called for dividers in our notebook:

1. Cost of goods sold. The expenses incurred in making your product.

2. Sales and marketing expenses. What it costs you to sell your
product.

3. Overhead expenses. Most of the other expenses incurred in oper-
ating an office.

4. Income taxes. We don™t discuss estimating taxes in this book, but
you should have a section in your notebook for tax planning and
discuss this with your CPA.
58 Set High Standards



In addition, we had a section for the balance sheet budget, which in-
cludes major capital expenditures. In the following index from our
budget notebook, the categories in bold type are section topics and have
their own sections, and each line item listed has its own page. Every
company will have its own additional items, but what follows are the
main categories that are almost universal:


Sales projections.

Cost of goods sold.
Materials purchased.
Salaries and wages.
Production supplies.
Temporary help.
Shipping supplies.
Mailing and shipping.

Sales and marketing expenses.
Salaries.
Sales commissions.
Direct mail.
Advertising.
Publicity.
Consulting.
Other sales and marketing expenses.

Overhead expenses.
Personnel.
Salaries.
Bonuses.
Payroll taxes.
Group life and health insurance.
Workers compensation insurance.
Employee benefit plans.
Officers™ salaries.
Employment expense.
Training.
Temporary help.

Facilities.
Rents.
Property tax.
Repairs and maintenance.
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Creating a Budget Everyone Can Use and Understand



Utilities.
Property and liability insurance.

Administration.
Accounting services.
Automobiles.
Bank charges.
Computer supplies.
Charitable contributions.
Depreciation and amortization.
Dues and subscriptions.
Legal services.
Licenses.
Miscellaneous.
Office supplies.
Other professional services.
Telephone.
Travel.

Income taxes.



Making It Happen

This process gives you a format for writing down and tracking expected
expense items, as well as a way to compare last year™s expected and actual
numbers for the same group of expenses. Worksheet 2.5 is an example of
what a budget notebook page might look like. I™ve provided a sample of a
page titled “Rents,” which might include office building leases, parking,
warehousing, and equipment rentals. Start by listing, at the bottom of the
page, what the budget and actual numbers were for the previous year. This
will give you an idea of what the expense figure for this year might be and
whether there is a tendency to over- or underbudget for this item.

The Rents category may include several general ledger accounts”office
space rental, equipment rental, or warehouse rentals. For each of these
general ledger account numbers, your accounting department should
have a standard list of vendors to whom they often write checks. Ask to
see this standard list on a regular basis.

Again, budgeting should be a participative process. Doing it alone defeats
the purpose. Teams should be given the responsibility to analyze last
year™s bills and project expenditures by category and vendor this year.
60 Set High Standards



Worksheet 2.5
Sample Expense Budget Page

2004
Rents
Main Building ABC Properties $196,806
($16,198/month, increases 3% on 8/1)
Parking Parking Lots, Inc. 480
(12 spaces at $40/month)
Warehouse SuperStorage 2,400
($200/month)

Equipment Rentals
Postage Meter Rental Pitney Bowes 835
($412.50 twice a year, due 1/1 and 7/1)
Copy Machines Xerox 4,272
($356/month, expires 4/4/07)
Telephone Bell Communications 14,628
($1,219/month, expires 7/1/08)
TOTAL: $219,421
Budget Last Year: $195,008
Actual Last Year: $201,962




Especially once you have been through the process a year or two, teams
should report to you annually on ways to reduce these expenses, and
management™s role during the process should be limited to making final
decisions on approving expenditures and to putting it all together to get
the desired profit picture.

On each blank sheet, first list the type of item. Next to each, list the ven-
dor of that item. Last, make an estimate of how much you think you will
spend on that item this year. This estimate can be made by looking at
how much you spent last year and making an educated guess as to
whether this will go up or down. You can also often get a close to actual
number if the item is based on a contractual agreement and doesn™t often
vary. Be sure to consider automatic price increase clauses and other hid-
den costs often overlooked. Wherever possible in this budget, list the im-
portant financial points of the lease to make this process easier next year
and to let the accounting department know if these payments are ex-
pected to increase, stop, or decrease at any point during the year.
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Creating a Budget Everyone Can Use and Understand



Reality Check

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