This is the time of year that we all look at our Profit and Loss
Statements and talk about the yearly results. It’s also a great time to
put some extra time into a Budget for next year. If you have been in
business for a while, it’s pretty likely, you pencil out some rough
sales projections and expenses for the upcoming year.
If you have employees, I’m can almost guarantee that you have a line
item for salaries and payroll expenses. You probably have a line item
for your most common Cost of Goods Sold. (Cost of Goods Sold is
typically, the items you purchase to either produce or sell your
products.) Supplies? Paperclips?
Where is the line item for the owner? How much money were you
planning to earn next year? Is there enough money to pay any taxes?
One of the most overlooked items on any yearly budget is a salary or a
monthly draw for the owner. Many people calculate the monthly draw on
the net income. I suggest going a step further. When creating your
Gross Margin forecast, include the owner’s anticipated draw in that
That’s right, I said it, put yourself above the paperclips on the budget.
Step One: Calculate your estimated Revenue. If you have Quickbooks,
run a sales report that shows the total items you sold last year. Were
you planning on increasing sales? Increase either the number of
services or the Sales Price per item. Multiply the two. That is your
Step Two. Calculate your estimated Cost of Goods Sold. Look at your
previous year’s Cost of Goods Sold. Divide by the number of items that
you sold last year. Did you increase the units you were going to
sell? Use that same number. Look at the price per /service unit that
you sold? Do you anticipate any price changes in the coming year?
(ie. Gas prices, raw materials, etc.) Increase the cost per unit by
your estimate of raising prices. Multiply the two. That is your
estimated Cost of Goods Sold.
Step Three: Add in your estimated draw to Cost of Goods Sold.
Subtract Step Two and Three from Step One.
Is the Gross Margin still positive? Yes? *gets ready to throw confetti*
Step Four: Calculate the Annual Operating Expenses.
Take a look at your previous profit and loss statement. Are there
any adjustments to be made? Increased office space? Hired people?
Postage increases? Etc. Adjust those numbers accordingly.
Subtract the annual operating expenses/budget from the Gross Margin.
Is the Net Income still positive? Yes? *throws confetti*
(Of course, Step One and Two are often broken down into types of
services or products. I’m over simplifying a bit for the purposes of
The net result of putting the owner’s draw in the budget is that
rather relying on ‘whatever’ cash is left or extra net income, is there
is a plan from the beginning to make the business profitable. And if
this sounds like too much work and you don’t have time to do a basic
budget. Please see the below quote.
Insanity: doing the same thing over and over again and expecting different results.