Perhaps this economic downturn caught you by surprise, or maybe it seems deeper than you expected. Regardless of how the rest of 2008 plays out, put your mind to the task of making 2009 a better year. Even if the economic horizon remains uncertain, your position in the marketplace will improve proportionately to the action you take now.
Let’s look at how to build a bottom-up budget for 2009 that takes into account everything your company, your family, and your future might need. “Bottom up” means starting with financial “needs” and “wants,” and using the total amount to determine how much volume you must sell to support them (after deducting for job costs). We’ll be using income, gross profit, overhead, and net profit concepts, so if any of them are hazy to you, read up on the past seven months of this column before continuing.
First, list the absolute minimum requirements: owner salary and company overhead (see table above, right). Because gross profit covers these two components, which total $250,000 in our example, calculate “breakeven” to determine how much you will have to sell to meet these minimum needs. The higher the margin, the less the required volume.
At 25% gross profit margin, you’ll need to sell $1,000,000 ($250,000 ÷ .25); but at a 30% margin, you’ll only need to sell $833,333. At 35% gross profit, you cover minimum needs by selling just $714,300. You get the idea.
Keep in mind, though, that this is your breakeven budget — the amount of sales volume at which you cover your job costs and your overhead, and pay your own salary. This is a good budgeting exercise, but it is never a good idea in real life. It’s tough to control job costs and overhead, so gross profit might slip. The next step is to add some cushion to protect yourself against contingencies.
As the example shows, you may also want to cover discretionary costs such as cash reserves or your retirement fund, or acceleratetd paydown of debt, like mortgages, vehicle loans, or lines of credit. (Regular payments such as rent or gasoline credit cards are included in overhead.) These numbers represent net profit — what is left over after paying all job costs, overhead, and owner salary — and they increase the gross profit requirement. When plugged into the breakeven formula, the higher gross profit amount increases the volume you’ll need to sell.
At a 25% margin, you’ll need to sell $1,660,000; at 35%, required volume is about $1,200,000.
What happens if you can’t control job costs or overhead? Something has to give and, assuming you pay your suppliers, employees, and subs, the difference will come out of net profit. If you don’t budget enough for net profit, any shortfall will come out of your salary.
Good financial and job management is essential, but success in 2009 begins with a good “bottom-up” budget.
—Judith Miller is a Seattle-based remodeling business consultant and trainer specializing in accounting, finance, and computerization.Visit her at remodelingmag.com under the ExpertOpinion tab, Blogs, or at http://remodelservices.wordpress.com.