By Tom Grandy, Founder
The vast majority of businesses do not live on a budget. The fruit of not living on a budget is easy to spot. The company spends more than it brings in and the debt spiral begins! Credit cards are used to cover extra expenses when cash runs out. When the credit cards are maxed out distributors are no longer paid on time and soon the line of credit is maxed out. The final step is often taking out that second or third mortgage on your home. If discipline is not used when it comes to money, bankruptcy will eventually be at the end of the tracks. The irony is that this does not have to happen.
Most business owners spend more money than they earn because they don’t know what their real expenses are. That is where a budget comes in really handy. The budget lists all anticipated expenses for the coming year, by month. The budget also includes anticipated sales each month. Simply comparing the estimated income to the estimated expenses will tell the owner if they are priced properly in order to generate a profit. Wouldn’t it be kind of nice to know if you were projected to generate a profit 12 months ahead of time? If the budget shows the company is not going to generate a profit this is the time to make changes before meeting with your CPA at the end of the year!
Another significant benefit of having a budget is to create a Budget vs. Actual Report each month. Reviewing the numbers each month will tell the owner if they are on target or not. If the estimated monthly profit was not achieved the numbers can easily be reviewed. Were sales lower than expected or expenses higher than expected…or both? If expenses were higher, which specific expenses were over budget begging the question, why?
Watching the numbers each month will not only tell management where the company stands. It also provides lead time to make changes to turn things around. If pricing or expenses need to be adjusted, it’s much better to know early in the year so adjustments can be made.
Having created a budget will also serve as a guide in terms of your spending. Before any major purchases are made the question needs to be asked. “Is the purchase of this or that part of the budget?” If it is, great, spend the dollars. If not, a serious discussion needs to take place before the money is spent.
Remember
Any significant increase in the company’s expenses will necessitate changes be made in the company’s hourly rate in order to maintain profitability!
Let’s assume the company decides to provide health insurance for its employees. One of two things is going to take place. If the cost is simply absorbed, the overall profit of the company will be reduced by that amount.
The other decision would be to increase the hourly rate to cover the additional expense. As an example, let’s assume the Service Department has three techs each of which produces roughly 1,000 billable hours per year. That means the three service techs will charge the customers a total of 3,000 billed hours over the coming twelve months. The cost of health insurance is $250/month per employee per month or a total of $9,000 (3 service techs x $250/month x 12 months = $9,000) for the three service techs. To absorb the additional $9,000, the hourly rate charged the customer for service work would have to be increased by $3.00/hour ($9,000 / 3,000 billed hours = $3.00/hour).
Do other expenses change over the year? Sure, they do. Prior to the beginning of each physical year a budget needs to be created in order to review the hourly rates the company is charging at the time. Remember, any increase in company expenses will either lower profits or be passed on to the customer in terms an increased hourly rate. The choice is yours!
This month the ProfitSmart KPI Tracker is on sale. Track the KPIs of your service technicians and find out how your Service Department is performing. Normally $399.00 this month it is on sale for $299.00. To get the discount, use the discount code: Ps25. Check it out HERE!
