As the 4th quarter begins, companies should be starting their budgeting process.  While there are A LOT of businesses that are highly budget-focused, there are also A LOT that don’t take the time to create one…for whatever reason.

As I mentioned in a previous post, there are 2 different ways to create your budget – 1) Revenue first or 2) Expenses first.   I’ll address each one below.

Revenue first

If you know or can project how much revenue you will earn in a year, then you can fit your expenses into that #.   With a gross profit margin of 50%, a budgeted revenue of $1mil will produce gross profit of $500,000.   Based on this, you can then determine how much labor you will need, how much the plant will have to run, as well as other aspects of you business, many of which will be fixed.  Once you budget for the expenses necessary to fulfill that $1mil of revenue, you can then begin to plan for any excess – bonuses to employees, investment into property, plant, equipment, dividend payments to shareholders, or into a “rainy day fund.”

This method could begin with a revenue goal that you want to achieve – a certain $$ amount or maybe a certain percentage increase from the prior year.   Generating this additional revenue could require additional resources which would find there way into the expense portion of the budget.

Expenses first

Hopefully you are already controlling your costs and know what they will be year over year – how much for labor, insurance, rent, software, etc.   Once you have these figured out/budgeted, you then know how much revenue you’ll need to meet these expenses.  If this revenue number seems out of reach, you’ll know that you’ll need to cut back in the expense area.   This could be a good time to look at the Return on Investment of your marketing programs or inquire of alternate insurance plans to reduce your costs.

Once you have created a budget, you can compare it to your actual results at any point throughout the year and (hopefully) explain any differences.  This could be by knowing how to correct any negative ones or how to continue improving any positive differences.

Regardless of which method you use to create your budget, I strongly suggest that you take the time to create one.  If nothing else, it will give you a great look at your performance from the prior year and the ability to adjust any programs you may be participating in.