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Consider these questions about your budget notebook:

• Have all important expense items been captured in the worksheet?
Does your budgeting process include most, if not all, employees?
Do you feel certain you have captured all your real expenses?

• Have you reviewed supplier contracts or other agreements to cap-
ture all costs and look for cost reduction possibilities?

• Are your preliminary estimates significantly over or under the
actual numbers for last year?

• Are explanatory notes understandable to everyone?

• Are there any items you are no longer using?

• Are there any numbers that seem out of proportion to the value of
the service you are paying for?

• Look at total amounts paid to various vendors during the previ-
ous full year. Will this year be about the same as last? Is there an
automatic increase to any of these expenses?

• Do you plan to use less of a given product or service next year?

• Do you always pay a specific amount for a given product or ser-
vice each month, or does it vary by the quantity used?

• Are there new vendors you™re negotiating with now that you plan
to begin using in the near future? How will they compare with
existing expense items?

• Are your expense categories all encompassing? Would all of your
suppliers™ services fit into some category?

• Will the categories you have chosen be meaningful in decision
making?

• Do some of these categories house too many different types of
items so it won™t be clear to all what the category means?
62 Set High Standards



PAYROLL PROJECTIONS

Worksheet 2.6 will accurately project and document payroll, the largest
area of expense for most companies. It is important to project payroll ac-
curately, not only because it is a significant expense in and of itself, but
also because of its direct impact on many other expense categories. Pay-
roll taxes, workers™ compensation insurance, life and disability insur-
ance, and retirement plan expenses generally all fluctuate with changes
in payroll.

This worksheet will help you to look at how payroll is spread out over
time. Most entrepreneurs know exactly which weeks they need to cover
their payrolls. It™s hard for most employees to understand, but if your pay-
roll is $1 million a year (and a company of 35 people can easily have that),
every two weeks the company sends out about $40,000 worth of paychecks.

My company paid employees every other Friday, which came to 26 pay-
checks a year. Employees got three paychecks in June and December, and
two in every other month. Accordingly, our payroll on a cash basis was
higher in June and December than in every other month. This becomes
important to know if June is your lowest sales month.

Finally, if there is one piece of most budgets to which not everyone has
access, that piece is the payroll. This makes it difficult to study for cost
reduction as openly as you might any other budget item.



Making It Happen

To calculate payroll, ask each manager to determine the department™s
head count and payroll costs. Worksheet 2.6 gives columns for each em-
ployee™s current salary (times a number of months) plus a column for
a salary increase (times the number of months the higher salary will be
in effect).

Adding the numbers in the last column gives you the total compensation
of each department™s employees for the year. Add below the actual payroll
for that department last year. Totaling the shaded box at the bottom right
of each department worksheet will give you the total company payroll.

Payroll is rarely, if ever, reduced, except in crises. Employees never ex-
pect their salaries to be static. They generally expect their compensation
Worksheet 2.6
Payroll Projections
Current Next Salary TOTAL
= Total at = Total
Employee Monthly Current Increase x% Future at New COMPENSATION
— # of — # of
# Employee Name Salary* Months Salary (Date) Increase Salary* Months Salary (Total Shaded Columns)




Total
Actual Total for Last Year $

*If hourly wage, convert to monthly. Formula to convert hourly rate to monthly rate is: Hourly rate — 173.3 (example $10 hr — 173.3 = $1733/month).
64 Set High Standards



to increase once a year. These increases rarely respond to real productiv-
ity increases. They™re part of an entitlement employees feel about their
jobs, which most assume include a higher salary and greater benefits
with each passing year.

Because of the always-growing nature of payrolls, many companies are
experimenting with progressive compensation plans, including perfor-
mance-based pay. Regardless of how you determine what you pay your
employees, payroll must be projected to get an accurate profit picture.



Reality Check

Consider these questions about your payroll projections:

• Are some departments™ payrolls increasing more quickly than
others? Is this because of additions to staff or pay increases? Is
this in line with your overall growth plans?

• Are your payroll dollars going to the areas you wish to emphasize?

• Are managers realistic about the increases they want to give?

• How much has your total payroll increased this year? In dollars?
As a percentage? How will this affect other expenses?

• Is your compensation competitive for your industry?

• Do you check at least annually for internal equity in your com-
pensation system?

• Do some months require significantly more dollars to meet pay-
roll than others?

• Is it possible to stagger pay increases throughout the year?

• Are salary dollars predominantly spent for employees making
and selling the products, or is a lot more spent on administrative
overhead?

• Is your projected head count higher or lower than last year? How
will that influence other expenses?
65
Creating a Budget Everyone Can Use and Understand



INCOME STATEMENT PROJECTIONS

This exercise pulls together on one page (see Worksheet 2.7) all the items
gathered in the budget notebook and looks overall at your profit picture.
Categorizing your expenses this way is important to begin to look at
your overall profit picture as a number you can control.



Making It Happen

From the information gathered in the budget notebook, you can begin to
analyze your profit picture by putting your numbers in four major cate-
gories as follows:


1. Cost of goods sold includes the direct costs that go into producing
your product. The percentage in the box next to this category is
the complement of your gross profit margin. In other words, if
cost of goods sold percentage is 69 percent, gross profit margin
is 31 percent.

2. Sales and marketing expenses include what it costs to market and
sell your product. In some cases, it costs more than the price of
the product to sell it, and only in repeat business is there a rea-
sonable profit margin. It is important to know so that you can
price accordingly.

3. Overhead expenses include all other items such as personnel not
in other categories, facilities costs, and administrative items
such as office supplies.

4. The net income at the bottom of Worksheet 2.7 should be a budget
item, just like the rest of your expenses. I™m not satisfied unless
this number is at least 15 percent, but this varies by your indus-
try and economic times.

To obtain the current year projection (the shaded column), enter the total
number from each budget notebook page you filled out for each category.
For sales, enter the projection for this year and the actual for last year
from the Dollar Sales Projections by Month Worksheet 2.4 (shaded box
on bottom right for both years). For other categories, enter the projection
number from each budget notebook page and the actual numbers from
the previous year that you added to each budget notebook page.
66 Set High Standards



Worksheet 2.7
Income Statement Projections
Current Year % of Actual % of Fixed (F) or
Notebook Item Projection Sales Last Year Sales Variable (V)?
Sales
Cost of Goods Sold
Beginning Inventory
Materials purchased
Salaries & wages
Production supplies
Temporary help
Shipping supplies
Mailing & shipping
Less Ending Inventory
Total Cost of Goods Sold
Gross Profit (Sales ’ total cost
of goods sold)
Gross Profit % (Gross Profit/
Sales)
Sales & Marketing Expenses
Salaries
Sales commissions
Direct mail
Advertising
Publicity
Consulting
Other sales & marketing
expenses
Total Sales & Marketing
Expenses
Overhead Expenses
Personnel
Salaries
Bonuses
Payroll taxes
Group life & health insurance
Workers compensation
insurance
Employee benefit plans
67
Creating a Budget Everyone Can Use and Understand



Worksheet 2.7 (Continued)
Current Year % of Actual % of Fixed (F) or
Notebook Item Projection Sales Last Year Sales Variable (V)?
Officers™ salaries
Employment expense
Training
Temporary help
Total Personnel
Facilities
Rents
Property tax
Repairs & maintenance
Utilities
Property & liability
insurance
Total Facilities
Administration
Accounting services
Automobiles
Bank charges
Computer supplies
Charitable contributions
Depreciation & amortization
Dues & subscriptions
Interest expense
Legal services
Licenses
Miscellaneous
Office supplies
Other professional services
Telephone
Travel
Total Administration
Total Overhead Expenses
Income (before taxes)
Income Taxes
Net Income
68 Set High Standards



Calculate the percentage of your total sales that each category makes up
by dividing the total number at the bottom of each box by the total sales
box at the top. You should have percentages for each of the items except
sales.

The last column of Worksheet 2.7 requires that you determine whether
your costs are fixed or variable. Variable costs are costs that are directly
impacted by sales. These costs are expected to change, more or less, in
proportion to the change in sales, for example, sales commissions. Fixed
costs are all those that are not variable”they don™t change as the level of
sales increases or decreases. An example of this is rent. Some costs may
have both a variable piece and a fixed piece, for example, utilities, which
go up as equipment is used more to meet production demands but are
relatively fixed for most of the office. For purposes of this analysis, ex-
penses that are in doubt should be classified as fixed.



Reality Check

Consider these questions about your income statement projections:


• Are you satisfied with the dollar number and the percentage at
the bottom of the page?

• Are these numbers higher or lower than the previous year?

• Compare these percentages with industry norms. Are you higher
or lower than others in your industry?

• Are category totals as a percentage of sales higher or lower than
you would expect?

• Have you questioned numbers that seem wrong to you? Do you
have backup calculations or information for all the numbers?



BALANCE SHEET PROJECTIONS

A balance sheet is a statement of what the company owns and what it
owes at a fixed point in time. The balance sheet can be illustrated by a
simple formula with three elements:

Assets ’ Liabilities = Owner™s equity
69
Creating a Budget Everyone Can Use and Understand



Making It Happen

Make a list of your assets and liabilities in the following categories. As-
sets can be current, fixed, or intangible. Liabilities can be short or long
term. What your business is worth or how much value you have built up
in the business is the owner™s equity.


Assets

Current Assets
• Your cash.

• Cash from loans or investors.

• Inventory”list type and value.

• Deposits paid upfront (such as rent and security).

• Other expenses paid upfront to be used over time (such as annual
insurance premiums).

• Accounts receivable”credit you give to others who will buy from
you now and pay later.

Fixed Assets
• Real property.

• Improvements to your location.

• Equipment.

Intangible Assets
• Intellectual property rights”copyrights, trademarks, patents
(list type and estimated value).


Liabilities

Current Liabilities (less than two years to pay back)
• Notes payable (such as bank lines of credit and equipment loans
that will be fully paid back in less than two years).

• Credit given to you to buy what you need now and pay later (ac-
counts payable).

Long-Term Debt (more than two years to full repayment)
• Bank Loans.
70 Set High Standards



Owner™s Equity
If your assets are greater than your liabilities, you have equity or worth
in your business that you should list on your balance sheet projections. If
your liabilities are greater than your assets, you have negative equity.
Many businesses start with negative equity, but all businesses should
seek to increase equity each year.



Reality Check

Consider these questions about your balance sheet projections:

• Are your assets greater than your liabilities?

• Over the life of your business, have your assets increased or de-
creased?

• Over the life of your business, have your liabilities increased or

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