How did it go? Was it an eye opening experience? For many, reviewing your current financial status gets the heart pumping and the tempers flaring. For others, it brings a sense of great accomplishment and self- assurance. If you are among the first group, don’t give up. Remember that this process is to help you get a clearer understanding of your financial status and put you on (or keep you on) the path of continued success , not to mention that steak dinner I mentioned in Part 1.
As a recap, last month we demonstrated how to review your current expenses by extrapolating them to the end of the year getting a clearer snapshot of where you will end up if you continued on your journey with making no changes.
Now that we are up to speed, shall we get on with the process?
Develop your Budget (Where you Plan to Be)- So as to not reinvent the wheel it would be best to obtain your current Income and Expense Statement (aka, Profit & Loss Statement). This statement will provide you with a pre-generated list of your current accounts. When viewing this document you should have three column headings as shown in the following example.
After reviewing each line item and developing an understanding of your current expenses you can now begin to fill in the Proposed Budget column.
You may recall that last month our example showed that the Electricity line item expense was over- estimated, and that by adding a 10% “buffer” to the extrapolated expense (barring no unforeseen activity) we could realistically budget this line item at $525.00.
This step is now used to develop each line item for your Proposed Budget. Once you have completed this process let’s go one step further.
How much of my overall expenses are dedicated to each category of my business?
A simple test of your expenses will allow you to gain better control of your success. In the above example let’s assume that the overall expenses for the proposed year are $30,000. With this example we are looking for what percentage of your occupancy budget is dedicated to your overall expenses. To find that out use the following formula:
Proposed Budget occupancy subtotal divided by your Overall
Projected Expenses of $30,000 = %
From the example above: $925/$30,000= 3%
Now sit back and use your good ole’ common sense, and ask yourself “ if it is reasonable to have 3% of my overall expenses committed to Occupancy?” For some it may be just about right; for others it may be an area where a little more research is needed.
While doing this step, you may discover that some proposed budgeted categories are a little more than you want to spend for the year, and this may come as a shock to you but, that’s good because it’s the purpose of this exercise. This simple step allows you to dig deeper into the reasoning behind the expense,and it allows you to ask yourself “am I utilizing all of my ASHI member benefits?” If you are not sure contact our friendly membership department, and they will be glad to assist you.
So now we have completed the expense side of this whole thing but let’s not forget a huge part of the equation.
Don't Forget about the Income-Calculating your income is done basically the same way as your expenses
In the above example let us assume that you are new to the home inspection field. On average you are currently performing one home inspection a week and charging $375.00 per inspection. You review your Strategic plan and see that in order to stay on your plan this year you will need to begin performing two home inspections a week at $375.00 per inspection. You further review that you planned for Radon Assessment to be added to your services. You have already decided that you will perform two radon assessments a month at a cost of $200.00 per assessment (per your Strategic and Work Plans). By increasing your number of regular Home Inspections from one a week to two a week and offering a new service to your clients, you have increased your projected revenue by $24,300.00 over last years budgeted amount of $19,500.00.
The final step is to figure out your bottom line. It’s simple really; you take your overall total proposed income, subtract your total proposed expenses and you end up with your total proposed budgeted profit or loss (in some cases).
That equals one really nice steak dinner. Don’t you agree?
If you show a loss, I recommend that you review your expenses first, then your income. Why, you ask? In my experience when companies develop a budget and notice that they are projecting a loss they try to “bump up” their income to develop a balanced budget. There is the problem; income is not a guarantee.
You can plan for it, and work extremely hard for it, but when it is all said and done it ends up being an uncertainty. I recommend expenses be reviewed first because it is literally the only area where you can control the outcome more easily. I realize that there are some who will have a hard time believing my statement so allow me to remind you of the latest recession. May I ask: at any time in your business did you become lackadaisical in your marketing plan, your services? My guess is no? The economy just tanked; you had no control over it.
As a side note: I recommend you do the percentage test with the revenue side of this process as well. It will allow you to see a clearer picture of that particular portion of your income and discover if it is helping or hindering your path to success. In the above example 100% of your Income is from the services offered, but this could be different depending on your line of services.
Now that you have just completed your realistic balanced budget, let me encourage you to review it and ask yourself a few simple questions:
"Can I live with this budget?"
“What type of sacrifices will I need to make in order to uphold my realistic budget?”
“If we have to make a sacrifice, is it worth it for the success of my business?”
If you find that the answers to these questions are something that you know will take a lot of effort to actually achieve then do the process over again. This needs to be something you can actually live with as it is the guideline to your success.
Estimate the Future- This is the part that allows you to dream big. Since your budget is a guideline of where you were, where you are and where you are going, it is important to think futuristic. This is the time where you need to begin implementing your ideas and creativity in order to bring your business to a lasting success.
If you have not done so yet, begin to develop your strategic and work plans. It may take some work, but the end result will be worth it.
But wait you say… how do I do a strategic plan? See I told you... you can’t get rid of me that easily. In upcoming issues of the ASHI Reporter we will begin the process of developing a Strategic Plan. Until then, Happy Budgeting!