Many small business owners cringe at the thought of creating a budget. You have enough to worry about and adding one more task to your to do list isn’t a high priority especially when it involves scrutinizing every penny you’ve spent. However, I would argue that the budget is one of the most underutilized tools available and when used appropriately can unlock a world of potential for your business.
Most people prepare a budget by estimating sales for the year and then trying to cut down expenses as much as possible or by simply taking the prior year actual figures and adding 2% for inflation. This approach may work well for some, but there is a different mindset I encourage business owners to adopt when creating a budget. Consider taking your profits first and then working backwards to determine how much in expenses you anticipate which will ultimately determine how much in sales are required to meet your goals.
WHAT DOES IT MEAN TO TAKE MY PROFITS FIRST ?
You started a business to ultimately provide income to support yourself and your family. So, determine how much you’d like to take home in pay this year to live your ideal lifestyle as a starting point. This number is your bottom line net profit. The next step is to write down all of the expenses you anticipate incurring this year. These figures will ultimately lead you to the annual revenue figure required to provide the profit needed to support your ideal lifestyle. Is this revenue figure reasonable? What are your strategies for growth to reach this revenue figure?
In order to create a sustainable business profit must be taken first. Traditionally, business textbooks have taught that Sales - Expenses = Profits. While it makes sense to cover expenses, there is no guarantee that you will make a profit in this formula. The Profit First Formula flips the equation giving Profit the attention it deserves.
Business owners should evaluate their actual results on a monthly or quarterly basis against an established budget and make adjustments as necessary to keep on track. If you’d like more information on the Profit First Formula, I suggest reading Profit First by Mike Michalowicz.