Making Your Monthly Nut

by Shaun R Smith on April 13, 2010

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In this third and final part of our series on budgeting, we will discuss the second issue that might prevent you from making money – you’re just not selling enough.  In the first week, we discussed how to project your revenues.  In the following week’s article, we discussed your direct costs and the importance of your gross margin.

The main categories left to your budget are the indirect expenses and net profit.  Indirect expenses are sometimes also called overhead, fixed expenses, general and administrative expenses, or just expenses.  These expenses include everything you spend that cannot be directly linked to a particular sale.  Once you subtract all these expenses from your Gross Profit, you have your net income or net profits.

Types of Expenses

Depending on the type of business you run, there is a wide potential range of expenses you could have.  Some common categories of expenses would include:

-          Marketing and advertising

-          Occupancy expenses

-          Salaries and wages

-          Insurance

-          Payroll expenses

-          Benefits

-          Professional development

-          Professional services

-          Utilities

-          Maintenance and repairs

-          Office supplies

-          Travel

-          Meals and Entertainment

-          Automobile and related expenses

-          Postage and delivery

Many of the categories listed above would have sub-categories under them.  Remember your business books must serve two major functions: they must help your accountant extract the information she needs to file your business’s taxes properly and they must provide you the information you need to manage the business.  Make sure that your categories are clear and well organized.  Often categorization to meet tax filing purposes is not clear or fine enough to manage the business.

Projecting your Expenses

In the budgeting process, you will want to analyze every line of expense.  Start with projecting forward your expenses based on a similar period the year before.  Then go LINE BY LINE through the projections and make adjustments based on your planning of the upcoming year.  Are there certain expenses that you know are going to increase – such as health insurance benefits?  Are there certain expenses that have grown beyond their point of value for your company and need to be cut back?  Again, like with the revenue projections, you want to be realistic – but also to push yourself.  Challenge your assumptions about the cost structure of your company.  Get creative in how you spend your company’s dollars.

Break Even

Break even is the point at which you neither make nor lose money.  It is the amount of Gross Profit that just covers your Indirect costs (or overhead).  Please note: it is NOT where your total revenues equal your overhead.  You must first subtract your direct expenses (or cost of goods sold).  What remains is your gross profits.  When you make enough gross profit to cover all your indirect expenses, you will be at break even.

Break even is so critical because it tells you how much you have to sell to cover your overhead – sometimes referred to as your monthly nut.  You don’t start making any money from your business until you exceed that sales point.

Once you do exceed that point, every extra dollar you make increases your profit.  Your profit will increase by:

Additional Sales x Gross Profit Margin.

To figure out what your monthly sales goal must be:

Target Break Even Total Sales = Indirect Costs / Gross Profit Margin

For example, if you sell an item for $100 and it costs your business $60 in direct costs to produce and sell it, your gross profit margin would be 40%.  If your monthly indirect expenses were $45,000, your break even would be $112,500 in sales per month (or selling 1125 units at $100 each).

The Benefits of the Process

Why bother with all this you ask?

The budget for your business tells you where you’re going and what you need to achieve to make it there.  It also tells you what you can expect from your business as time goes on.

Without a budget, your results are only guesswork.   Once you understand your numbers and especially your break even, you know what hurdle you have to jump each month.  After you’ve hit that mark, any additional sales just increase your profits.

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