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Budgeting Essentials Blog

Helping you master the practical essentials of Budgeting, Cash Flow, Accounting and Debt Relief.
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Budgeting - Start working on income early

Last week I talked about concentrating on important items. If you missed that post, you can review it HERE.  This week’s topic is start working on income early. Estimating your revenue (Income) correctly is the key to creating an effective budget.



If your revenue is off, the rest of your budget will also be off. The basic formula for income is revenue minus expense equals profit (income). If you over estimate your revenue, you will budget your expenses and your profit too high. This results in overspending and under achievement of your profit goal.

Let me give you a simple example to illustrate this.  I am going to use small numbers to illustrate this so you can look at the concept without having to work through the math to understand what I am saying. 

Let’s say your profit goal is 12 and you incorrectly estimate your revenue at 120.  Chances are you are going to budget your expenses at 108.  Using the profit formula you take 120 (revenue) minus 108 (expense) equals 12 (profit). 

But if your revenue should have been budgeted at 96 instead of 120, the formula now gives you 96 (revenue) minus 108 (expense) equals (NEGATIVE) -12 (loss).  The overestimate in revenue gives you a difference of -24, which flowed right against your profit and in this example turned it into a loss.  To make this part of the example easier to see, I assume no spending changes are made during the year.

If you are comparing your actual performance to your budget regularly, you should be able to catch that difference early in the year so you can make adjustments to your spending.  But in order to still make your profit goal for the year, you are actually going to have to spend less on your monthly expenses than you would have if you started with a number that was closer to what the reality is.  (See the sample numbers at the end of this post).

Typically you will see your January results sometime in February, so it will probably be March before you can make adjustments to your spending.  The longer you wait to make your changes, the more drastic they will be in order to allow you to achieve your profit goal.  There will come a point where you will not be able to reduce your spending any further to allow you to achieve your goal.  Remember that even though the differences don’t look big here, if these numbers represented thousands (1000 instead of 1), you could quickly get yourself into a bind that you could spend a lot of time and energy to correct.

Hopefully this example helps you see how getting your revenue right determines how much you have to spend on your expenses so you achieve your profit goal.  Take the time to develop good numbers while you are creating your budget so you won’t have to do a major rework your numbers when you get into the year. 

Remember that even if you do a great job on your budget, that doesn’t mean you won’t have to make any adjustments.  Because your budget is an estimate, you will still have adjustments to make.

The sooner you have solid revenue numbers to work with, the more time you will have to make quality decisions on your expenses.  This will give you a better budget. You will have a solid guide for running your business that will help you put more of your hard earned money in your pocket.  Don’t put yourself in a position where you are setting yourself up to fail.  Start working on your income early in your budget process and give yourself enough time to do solid projections on your revenue.  You will end up with a well thought out budget and it will be a useful tool you can use to manage your business!

Here are the numbers I used for the examples:

besample0205

Spending difference after getting behind: 

Original budget and expense level is 9.  Adjusted expense level is 6.6 compared to the better budget level  of 7.

These numbers were used to help you see the concept without having to navigate the math first.

Copyright

© 2018 Dan Heiland 2018 Kat Heil, LLC

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