Using A Budget To Make Your Business Profitable

And so far, we’ve talked about creating the plan, creating the budget, the next thing you want to do is enter the budget into your financial software. So, I’m using QuickBooks for an example, but it doesn’t have to be QuickBooks. So, you enter your budget and the first thing you want to do before you enter the budget is clear the create a chart or account that matches the budget. Because in that way, you can be sure you’re comparing apples to apples. We can see here in our budget that we talked about a previous video, that we have a line item for service income, that we need to track directly to zeros, and we sort of want that to be zero because it’s going to be incoming and outgoing. So basically, we’ll get the charge and we inquest that to our customers so the net effect should be zero, we track our labor costs and then all of our overhead.

Now, this is the category that we talked about when we developed the budget. Now depending on your business, it could be different, you don’t have to have just the materials, labor and overheads. Some people might have more than three main headings, depending on what type of business you have. Just remember, whatever the structure is, is whatever serves the information you’re trying to get from your system. So, depending on the kind of information you’re trying to pull out, that determines the kind of input you pull in. So that’s why we have the planning process, the planning process in part one helps us define what we need so we can create the right system or Chart of Accounts to track that information.

So now we created a Chart of Accounts that matches our budget. We’ve entered the budget into our system. Once that’s all done the set-up mostly done. Now what’s left is, on a regular basis, we need to enter data into our financial software. That data is done daily, weekly, however suits your business. Now, this is not a lesson about how to enter data into QuickBooks or a financial software, I’m just trying to go through the major concepts here. So, you can, if you’re already doing this, you can kind of incorporate into the practices you already have.

One thing you have to be careful for is when you entering data is the classification. You have to be, make sure you’re consistent with how you classify data, because garbage in, garbage out. If you’re not consistent the way you classify data, then you don’t have meaningful data. For instance, how do you know, when I say I spend $365 on job supplies. When I click there, I should see all of the job supplies that makes up that $365. If in these job supplies, I have “marketing”, I have “meals”, I have “advertising” then when I look at that job supplies number, it’s nonsense, and I can’t really compare it to the budget. But when everything is classified correctly, at least I know I have correct data in my software and I can compare correctly to my budget and see where I am. That’s very useful information I can use to make my decisions for my business.

While entering data, something you want to make sure you do while you’re entering data is you assign any cost that can be traced directly to that customer. So that way you can actually run a profit by customer report, and you can look at each customer, see what income you have, see what expenses you have and see which customers are profitable and which ones are not. Any cost that cannot be assigned to a customer, because it’s not… Basically, it’s something you buy that’s used for all customers, or you can’t trace any customer, it’s just general overhead, which will be allocated to all customers just like we did in the budgeting process.

There are many ways to allocate costs overhead to different customers, but the easiest way is to download to Excel. And then you have to get data for how many hours, labor hours, you’ve used for this period. Here we can see for this business we used 32 hours and for this business we used 97 hours. Then the next thing we want to do is we want to get the rate for overhead we calculated in the budgeting process. We see we had a rate of $10.87 from the budgeting process. We multiply that by the $10.87 to get a $351.90 ABC and $1,055.70 for BDE. Now we can make adjustment in QuickBooks, if we want to, but I don’t really recommend it because you can get the analysis you need from an Excel file. And then, we go ahead, and we enter that and then we subtract that for my overhead. And then whatever is not allocated, I had made adjustments before, so I removed it just so you can see what’s happening. Whatever is not allocated, it’s going to show up here as your difference. This amount is the amount allocated plus amounts that’s directly traceable to any job. Anything that is not directly traceable to any job does not have to be allocated. So this one $1,817.40 is not allocated.

Now that’s a problem, that’s way off from our budget. So the next thing we want to do is, okay, where are we away from our budget and we want to make adjustments there. Through this one-off is the small equipment and tools, and the small equipment and tools are normally bought to be used over couple of years, so normally it should be depreciated. The amount that really should have been taken out in this budgeting period ’cause we expect that the equipment to be used over 60 months should have been this. So, once you make that adjustment, you can see that we only have, we’re closer to what we budgeted which is better, so we’re still in line with our budget. Anything that’s still over the $0.75 will have to be added to our previous overhead rate of $10.87 because that’s what our customers going forward will be charged. And that’s by how much we need to increase our prices, because our cost is above what we budgeted.

So, which is why the comparison is very important because over time you want to see how your cost is changing, and while you won’t go back to adjust your previous customers revenue, not so quickly. You want to make sure that any cost increases are past your future customers, so that way, overall, you’re still profitable even if it gets to the end of the budgeting year. Once you’re done with entering the data, now you’re ready to look at the information that has been provided for you and actually make sense of it and use that to make decisions. So next, in the next video, we’ll talk about looking at information and talking about what it means for your business.

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