Budgets come in all shapes and sizes. Thinking about a comprehensive budget can be an overwhelming proposition. Many small business owners get bogged down in the details, and decide they won’t have the time or the knowledge to do it right, so why do it at all. But that doesn’t have to be the case. While your time is scarce, you need to be sure your business is profitable.
Dealers have many reasons to put together a formal budget. It is an excellent tool for business planning. It will make achieving the goals you have for your business more manageable. It will provide you with powerful bargaining power with your banker. The most important thing your budgeting will do is protect and improve your financial performance and position.
It is important to think of your budget as a “living” document. By careful planning, it will help you anticipate and prepare for changes in your business. But it can also be adjusted to accommodate the changes you couldn’t anticipate (for instance, weather).
Your budgeting tools should not just your history, but more importantly, forecast the future (one year) for your business. History is important to use as a gauge for future performance, but there are many other factors to include when determining your projections. Think about cost increases, industry trends, changing customer buying habits—anything that will affect the sales, productivity and profitability of your business.
The idea of designing a budget can be daunting, but there are many resources that can help. One of the best places to turn is to your computer. It is often the case that your current business system already has budgeting capabilities. Check with your system vendor. If not, there are financial packages available designed specifically for the outdoor power equipment dealer. Be sure to choose one that allows you to customize the information needed to manage your business.
Start with the basics
A budget can include as much or as little detail as you need to manage your business and determine profit. The exact design is completely up to you, and you will probably tweak the design over time until you come up with the perfect design for your business. However, as a starting point, we can discuss certain elements every budget should contain to give you an accurate picture of the performance of your business.
Consider also that it may best serve your business to do “departmentalized budgeting.” This is where you create a separate budget for each profit center. For instance, you may have one for the sales department, one for the service department and one for the parts department. Or you may want separate budgets for consumer sales and commercial sales. For simplicity’s sake, we will combine them in one budget for our example. But as you grow, you may want to consider departmentalized budgeting for more efficient management of your dealership.
When making a budget, the best place to start is with last year’s income statement. This will give you a reasonable benchmark to help determine what your projections will be in your budget.
What to include in the budget
Every budget should include projections for each category in the income statement. The basic categories are: revenue, the cost of goods sold, expenses and taxes to determine net income.
Set a reasonable goal for the New Year
The first question to ask yourself is: How much do you want to grow in sales next year? What will be a reasonable increase? Once you have a percentage of sales growth, you will look at each line item of expenses and determine what you can do to reach your goal at the bottom line.
Revenue is, of course, sales. Think about how you can increase sales. Can you broaden your product line? (Remember to reflect that additional cost in your inventory expense). Can you target a new customer market? (Remember to reflect additional costs in marketing expenses).
Cost of goods sold