We're now five months into the year and if you don't have a Plan for Profit (less glamorously known as a budget), let's get it done. If you do have a budget, you may be able to take it to the next level and find it even more useful. A budget is not just a piece of paper to develop, check off that it's done, and stick in a file. It is the way to achieve the desired results for your business and deal with the ups and downs of a given year.
Build Your Budget Build your budget. Your aim is to replicate the Profit and Loss statement that at the end of the year will show the outcome you desire, while at the same time using realistic projections. What production volume can realistically be achieved given your company setup and your economy?
Next, figure what your job costs or costs of goods sold will take from that volume. Here we meld the answers to two questions: What gross profit percentage should your markup produce? And what gross profit do you typically produce?
If your job costs typically overrun your projections, you'll want to make allowances for that. For instance, you may be marking up 57% for a 36% gross profit but actually coming out with only a 31% gross profit. You'll want to have a plan for stemming job cost erosion, and if you feel you can do that, you might choose to figure a 33% or 34% gross profit.
Out of that gross profit you now figure each and every line item of overhead precisely. Also, what new expenditures might you be planning that you didn't have in 2004? Maybe you plan to add a clerical person and they will need a desk, computer, software, etc. Be sure to include your salary as overhead or job cost. You are a company expense.
Now, do the math to see what will be left as net profit. Oops, none left? You'll need to go back and raise volume or markup or cut overhead or all three.
Keep reworking the budget until it all fits and you feel you can achieve the targets. Now you have your plan for profit!