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Starting at the Bottom: A Better Way to Budget

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If you’re like most business owners, budgeting is one of your least favorite chores.

It’s difficult. You can’t predict the future. Maybe you can just update last year’s numbers.

Wrong, wrong, and wrong, say the experts.

“Too many business owners think they don’t have time for budgeting,” says consultant Steve Wilkinghoff, president of FoundMoneyCFO.com in Calgary, Canada. “They really put their head in the sand. A budget is simply what you think you’ll do in the next year and the financial results that will come from it.”

The most common mistake business owners make, Wilkinghoff says, “is doing a mathematical budget. They look at last year and think they can increase this and shave that. On paper, it shows a lot of money. But then they don’t track actual performance. If they don’t hit their targets, they think that’s just the way it is and treat it as a dead document. They don’t see what they can do to get back on track.”

Most experts advise you to prepare a budget from scratch. Wilkinghoff calls it bottom-up budgeting. “A business exists to serve the business owner,” he says. “You start with the desired results. What do you want for yourself and your family? Then you see what that means at the top end: how many customers you need and how often they have to buy from you, the average revenue you need, and the average gross profit. That will drive a granular budget.”

A bottom-up approach may also send you a message you don’t like: your business, as it exists, can’t support it.

“A budget does two things,” says Ellen Rohr, founder of Bare Bones Biz, a consulting firm in Rogersville, Missouri. “It helps you set goals, and that’s reason enough to do it. But it also helps you come up with a justifiable selling price strategy. Many business owners aren’t charging enough to pay themselves well. Where’s the sense in that?”

For starters, Rohr advises that you add up your operating costs and divide that number by how you measure sales—widgets, hours, days—depending on your business. That will tell you what you need to bring in per widget/hour/day just to stay even. Then you need to inflate that number for your desired amount of profit.

“You may find that the only way to meet that goal will be to raise your prices—perhaps significantly,” says Rohr. “Some people won’t notice. However, you can also raise your standard and be worth the higher prices. That is the key to long-term success.”

Become known as the best in town, not the most expensive, she advises. Testimonials from good customers will attract more good customers.

“Be proactive,” says Rohr. “Review your budget weekly, so you can still have a positive impact on the month you are in. If you’re off, make more sales calls, change suppliers, or take some other action. Your goal isn’t to sit where you are; it’s to take your company where you want to go.”

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This information is general in nature, is provided for educational purposes only, and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice.  Regions neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.