Imagine it’s December 2021, and you’re reviewing the results of your business for the past year and you notice that compared to 2020, your profits are WAY up, AND, you didn’t have to kill yourself to make it happen! How great will that be?!
That’s what’s possible when you get intentional about your profits. Planning for increased profits by creating an operating budget for your business is the first step. I don’t just mean a revenue plan (most people have one of those), I mean planning for bottom-line net profits and increased cash flow.
In today’s video, I’m going to share with you the tools and steps to employ to help you do just that for your business.
Before I jump in, let me ask you a question. Are you one of those people who think that doing budgets for your company is a waste of time? Maybe you feel like you never meet your goals, so why bother. Or maybe you feel like it’s restrictive and limiting, and you want to have freedom and choices about what you do with your money?
It doesn’t have to be that way when budgeting is approached with the right mindset. In fact, it can be the most empowering and liberating thing you’ve ever done for your business! It’s just like preparing an estimate on a project. When you bid on a job you:
- Get intentional in figuring out what it’s going to take to complete the work
- You determine what it’s going to costs
- You build in mark-ups to generate a profit
- You figure out how to do the work within a budget
- Then you track your results against the budget to help you stay on track
It’s just like that when building an operating budget for your company, and then tracking your results to make sure it happens.
When you use that same approach to budgeting for your whole business, you can create much more profit for your business, and have cash in the bank when you need it. And just like projects, you have more clarity about what it’s going to take to have it turn out.
Being intentional about planning for profits using an operating budget will give you…
- Money to invest back in your business, which will stimulate growth.
- The ability to offer profit sharing with your employees or offer generous bonuses.
- Cash to pay off debt.
- Cash on hand to accommodate unexpected events or slow receivable payments.
- More money to pay out distributions to YOU
Thinking beyond just revenue, and setting goals for gross profit margin, net profit, and cash reserves, and YOUR paycheck, you begin building a plan for profits that gives you the roadmap for getting from where you are now to where you want to be.
This post and the accompanying video will go in-depth on how to set goals for your company and then how to set an operating budget to support those goals. I’m going to walk you through a goal worksheet that’s a great starting point, and then dig into how to develop an operating budget for your business.
Setting overall goals and identifying your plan for the comping year is the first step to creating a budget. The best way to do that is use my free resource, the Budget Goals Worksheet. Download it now to walk through this process with me. This step of planning for profits is just like first looking at a set of blueprints for a project – it sets the trajectory for where you want to go.
Answering these questions will help you formulate a budget plan.
- Revenue goal – How much will you bill this year? Looking at last year’s actual and your backlog of signed work is a good place to begin to establish this number.
- Gross profit margin – Contractors live and die by gross profit margin, or rate of return on the work they’re doing. To set your goal, look back at the past 5 years’ gross profit margins and see what the average is. If your rate of return is too low, make sure to check out my book “The Profit Bleed, How managing margin can save your contracting business.” In it I give you lots of tips and tools for being able to increase the gross profit margins in yoru business.
- Net profit margin – This is your rate of return on the bottom line. A company that is run well will have a net profit margin of 8 to 10% after the owner’s salary. If it’s run really well, it could be as high as 10 to 12%. It will be smaller for businesses with revenue exceeding $10 million. Make sure to listen to the video for more on this.
- Cash reserves – A good rule of thumb is 3 to 6 months of overhead expenses in cash reserves. This helps cover you if there is a gap in billing or work, or a big expense comes up, you can cover it.
- Owner Salary / Earnings – If you’re a business owner, what do you want YOUR paycheck to be? This should NOT be random and just what’s left over. By shifting your thinking, you can create a plan around how you’re going to get to your ideal compensation..
- Potential Cost Increases – The next set of questions help you determine what you need to plan for such things as changes in salaries or staffing, changes in organizational structure, and projects that can add to costs.
- Capital Needs– Next you’ll look at new equipment or assets that you’ll need.
- Debt – Then what debt you’ll need to pay down?
- Outside Support – The last question is about professional fees like legal, accounting, consultants, and training or sales coaching.
Once you have all of that, you can start to build your operating budget. There are 4 basic sections to a budget. If you watch the video you’ll get more depth on this that will help you in building an operating budget.
- Cost of Good Sold and Gross Profit Margin
- Your revenue minus your cost of goods sold is your gross profit dollars.
- Your gross profit margin is the percentage of your rate of return.
- Your overhead expenses – What it costs to run your business requires intentional planning because otherwise expenses can easily get out of control. I give you a few different ways in the video to plan with purpose to allow for maximizing profitability.
- Overhead for labor is most likely your largest cost item, and it’s one you want to get right, so figure this number out including burden.
- Other income and expenses like debt, partner distributions, etc.
In the video, we’re working off a budget worksheet template I use with my clients. I don’t have this available on my website but feel free to email me if you’re interested in it.
When you’ve completed your budget, look at the amount you have to mark up your cost of goods sold just to break even, and that’s your breakeven percentage. NOTE: A lot of people get this number wrong, so make sure to listen to the video for correct way to calculate this number for your business.
If about now you thinking, “This takes a long time!” you right. But isn’t planning for increased profits and cash flow worth it? I have clients do this process gradually over a couple of months. Don’t try to do it all in one sitting. Just like you think it through when preparing a client bid, it’s important you take your time and think through your operating budget and plan for increased profits.
Going through this process, it will give you both peace of mind and freedom. If you want to have more profits in your business – whether to invest in the growth of your company, take home more income yourself, or both – you have to be intentional about setting goals and then figuring out how you’re going to get there. And that’s what you’re going to get from doing this planning-for-profits budgeting process.
In my book, The Profit Bleed, you can find money management tools and free downloadable resources that bring clarity to budgeting and the profitability of your business – and all you have to pay is shipping and handling. Make sure to check out the bundle of pre-packaged resources when you check out!