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VARIABLE BUDGET/PROFIT PROJECTIONS

VARIABLE BUDGET/PROFIT PROJECTIONS

This document is an extremely valuable management tool.

A fixed budget is of little value if the income projection is substantially off.

All of the other expenses based on the faulty projection will be off also.

With a variable budget, management can compare expenses with the actual volume.

In addition, this provides a Break Even Point without further calculations.

You can also play “what if”. For example, if sales are decreased by 5% but expenses remain the same

(as is the case in cutting prices) you can readily see how much more you must sell to make the same

profit. Sometimes some unexpected facts are discovered by using this document. I know of one company

which had multiple plants. In one of the plants the cost of water exceeded the budgeted figure for

three months straight. The amount was minor but an investigation found that there was a leak in an

under ground pipe and, if not corrected would have caused serious damage to the building.

This also makes possible “Management By Exception”. This merely means that if the actual costs and

expenses are reasonably close to the projected figures, management can forget about further analysis

and move on to more pressing tasks of running the business.

The following is an example of a variable budget. In the next chapter there is a template showing how to

construct a variable budget worksheet using your own figures.

Profit Projections
Also known as Variable Budget

Sales – Product 1	$70,000	$80,000	$90,000	$100,000	$110,000	$120,000	$130,000
Sales – Product 2	$21,000	$24,000	$27,000	$30,000	$33,000	$36,000	$39,000
Total Sales	$91,000	$104,000	$117,000	$130,000	$143,000	$156,000	$169,000
Direct Costs
Materials – Product 1	$26,250	$30,000	$33,750	$37,500	$41,250	$45,000	$48,750
Materials – Product 2	$9,660	$11,040	$12,420	$13,800	$15,180	$16,560	$17,940
Direct Labor	$10,780	$12,320	$13,860	$15,400	$16,940	$18,480	$20,020
Manufacturing Supplies	$1,295	$1,480	$1,665	$1,850	$2,035	$2,220	$2,405
Delivery Expense	$3,360	$3,840	$4,320	$4,800	$5,280	$5,760	$6,240
Total Direct Costs	$51,345	$58,680	$66,015	$73,350	$80,685	$88,020	$95,355

Gross Margin	$39,655	$45,320	$50,985	$56,650	$62,315	$67,980	$73,645

Other Manufacturing Costs
Maintenance – Building	$100	$100	$100	$100	$100	$100	$100
Maintenance – Machinery	$1,000	$1,000	$1,000	$1,000	$1,000	$1,000	$1,000
Maintenance – Trucks	$2,000	$2,000	$2,000	$2,000	$2,000	$2,000	$2,000
Maintenance – Autos	$1,700	$1,700	$1,700	$1,700	$1,700	$1,700	$1,700
Cleaning & Security	$100	$100	$100	$100	$100	$100	$100
Rent	$6,000	$6,000	$6,000	$6,000	$6,000	$6,000	$6,000
Electricity	$1,164	$1,176	$1,188	$1,200	$1,212	$1,224	$1,236
Other Utilities	$485	$490	$495	$500	$505	$510	$515
Depreciation	$3,000	$3,000	$3,000	$3,000	$3,000	$3,000	$3,000
Total Other Manufacturing Costs	$15,549	$15,566	$15,583	$15,600	$15,617	$15,634	$15,651
Selling Expense
Salaries	$2,000	$2,000	$2,000	$2,000	$2,000	$2,000	$2,000
Commissions	$2,310	$2,640	$2,970	$3,300	$3,630	$3,960	$4,290
Advertising	$50	$50	$50	$50	$50	$50	$50
Travel & Entertainment	$400	$400	$400	$400	$400	$400	$400
Total Selling Expense	$4,760	$5,090	$5,420	$5,750	$6,080	$6,410	$6,740
Administrative Expense
Salaries – Executives	$5,000	$5,000	$5,000	$5,000	$5,000	$5,000	$5,000
Salaries – Office	$15,000	$15,000	$15,000	$15,000	$15,000	$15,000	$15,000
Health Insurance	$2,500	$2,500	$2,500	$2,500	$2,500	$2,500	$2,500
Property Insurance	$400	$400	$400	$400	$400	$400	$400
Other Insurance	$100	$100	$100	$100	$100	$100	$100
Professional Fees	$400	$400	$400	$400	$400	$400	$400
Local, Federal 7 State Taxes	$2,000	$2,000	$2,000	$2,000	$2,000	$2,000	$2,000
Bad Debts	$667	$667	$667	$667	$667	$667	$667
Contributions	$100	$100	$100	$100	$100	$100	$100
Total Administrative Expense	$26,167	$26,167	$26,167	$26,167	$26,167	$26,167	$26,167

Operating Profit	($6,821)	($1,503)	$3,815	$9,133	$14,451	$19,769	$25,087
Interest Expense	$1,250	$1,250	$1,250	$1,250	$1,250	$1,250	$1,250
Net Profit Before Income Taxes	($8,071)	($2,753)	$2,565	$7,883	$13,201	$18,519	$23,837

From this you can see that the break even point is about $110,000 in sales volume. It also shows that each increase in Sales of about $ 13,000 yields a projected profit increase of about $ 5,000.

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Recipe for Accounting Principles

Accounting Tips

Recipe for Accounting Principles

Ingredients

3 Ice cubes
2 ½ ounces of bourbon
3 Mint leaves

Directions

Place ice cubes in a glass
Add the bourbon and a splash of water
Crush one mint leave around outside of glass
Squeeze juice from two mint leaves into glass
Sip the julep slowly and read the boring article which follows
Repeat the recipe as needed

Accounting might not be the most exciting subject in the world, but it is an essential component of running a profitable business.

Most companies don’t do their accounting by hand. For routine accounting, most companies use accounting software such as QuickBooks, Peachtree or more specialized programs for specific industries. Do some research to see if your industry has a dedicated accounting software — it’s worth the effort. They are excellent programs that save you time and energy, but it is good to know what the program is doing so that you can interpret the figures correctly and catch anything unusual. After all, a computer is no substitute for the human mind. Perhaps the following tips will be of some help!

Like all professions – medical, legal, even my own humble profession of box-making – accountants have their own vocabulary which sometimes makes simple things look complicated to the uninitiated. Actually, a good deal of accounting is basically common sense. The most basic system used is called “double entry” which simply means that each entry in your accounting must have a corresponding entry to balance it out.

There a few reports which are important. They include:

Balance Sheet
Profit & Loss Statement
Sales Report
Cash Flow
Production Reports

The Balance Sheet shows the health of the company. It is divided into 3 parts — assets (which are debits), liabilities, and stockholder equity (which are credits). The debits must be offset by credits of the same amount

Simply put, the assets are what the company owns and the liabilities are what the company owes. Equity is what is left over if the liabilities are subtracted from the assets. This is also known as “Book Value”.

The assets and liabilities are divided into current, fixed and other.

A current asset is one which can be converted to cash in one year (Accounts Receivable, Inventory).

A Fixed Asset is something that has been purchased but is not an expense. (Machinery, Autos).

Other Assets are items which are neither current nor fixed (Investments).

A current liability is one which has to be paid in one year (Accounts Payable to Suppliers, Short Term Loans).

The Profit & Loss Statement shows the results of an operation for a given period of time. Simply put, if you sell something for more than it costs there is a profit. If you sell something for less than it costs, there is a loss.

These statements have several parts. This is a brief run-down of the various parts of a Profit and Loss Statement, to help you get your bearings when using accounting software.

When your company makes a sale, an invoice is created. The debit entry is marked as Accounts Receivable (usually with customer name and invoice number). The credit entry is marked as Sales.

When you receive payment for your sale, it is charged (debited) to Undeposited Funds. It is credited to Accounts Receivable, along with the customer name and invoice number. This reduces the amount the customer owes. When the funds are deposited in the bank, the Bank Account is debited and the credit goes to Undeposited Funds. This cancels the Undeposited Funds entry and increases the Bank Account.

When you purchase an item for your company (raw materials, supplies, spare parts etc.) the amount is charged (debited) to the proper expense account and the credit goes to Accounts Payable (with the Suppliers name).

When you pay for your purchase, Accounts Payable is charged and the Bank Account is credited. This reduces the amount you owe the supplier (the person or company you purchased the item from) and the amount you have in the Bank Account.

If you purchase a fixed asset –- for example, a delivery truck — the purchase shows up as a debit in the proper subcategory (in our example, it might be to “Vehicles –- Truck”). The credit goes to Accounts Payable if you are going to pay within a short time (usually a fiscal year). If you are going to finance it, the credit will go in notes payable in the proper subcategory.

Buying a fixed asset does not affect your profit line, since it is not an expense. However, it does affect your cash flow. To recover the cost of a fixed asset, you use something called depreciation. The theory behind depreciation is that each fixed asset has a useful life, and the cost of this item must be recovered during the useful lifespan of the item. For example, if a machine costs $100,000 and is expected to be productive for 10 years, you must recover $10,000 per year ($833.33 per month) to recover the cost of buying the equipment. This cost must be included in your selling price in addition to your regular cost of expenses. The Internal Revenue Service allows this to be deducted from your income, but it also specifies the useful life of various types of fixed assets.

The sales report, as the name implies, is a recording of sales for a given period. There are many ways to organize a sales report. Three of the most useful are:

By Customer
By Salesmen
By Item

Each of these has its own advantages. Looking at your sales by customer can tell you if you are gaining or losing business in various areas, sales by item can reveal which of your products is the most popular, and sales by salesman is invaluable in finding out how your employees’ success rate changes over time.

The production report shows which type of product is generating the most business. This is very important for management. It also tracks the efficiency and hours of usage for each machine, if your company manufactures goods.

The cash flow report is also very valuable to all levels of your business, but especially to management. It allows you to plan future payments, business expansion, and fixed asset purchases. It can be presented in various forms. The following is one of the most used:

Cash generated from:

Net Profits………………………….$ xxxx
Depreciation…………………………. xxx
Reduction in Accounts Receivable……….. xx
————————————————
Total Cash Provided…………………..$ xxxxx

Cash applied to:

Decrease in Accounts Payable…………..$ xxxx
Increase in Inventory…………………..xx
Purchase of Machinery…………………..xx
————————————————
Total Cash Applied……………………$ xxxx

Net Cash Flow: $ xxx

Depreciation is classed as an expense and reduces the net profits, but it is a non-cash expense. Change in Accounts Receivable, Accounts Payable and Inventory all affect the Cash Flow and can be a source of cash — or a big drain on your company’s finances. A good understanding of the principles behind accounting can keep your accounts and inventory focused on your bottom line.

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Accounting for Salesmen

This title is perhaps a bit misleading. What I intend to do is not to convert salesmen into accountants but to show the great advantages of having salesmen and accountants working together. A company which has a sales-minded accountant and a profit oriented salesman is fortunate indeed. Let’s explore the ways to develop this very important — and profitable! — situation. First, we will explore a concern which is important to both areas: Record keeping. This is, of course, a basic part of accounting, but it is also important for sales personnel. While accountants keep track of income and expenses of the company, salesmen keep track of income and expenses of their own. However, a good salesman also keeps in mind that each of his customers should produce sufficient income to cover the expense of servicing his account while still leaving some left over for profit.

At the same time the accountant should provide the salesman with information about his customers. Good examples of customer information which can benefit the salesman are:

Average usage by product type
Gross profit by item
Credit history of the customer

One important aspect of making a profit, but at the same time staying competitive, is pricing. Here again, having an accountant and a salesman working together is invaluable.

Cost estimating is a science but pricing is an art. After the accountant has calculated the cost of producing a product, the salesman should be brought in to help the management determine the selling price. The salesman, if he is good, has a good idea of what the market will bear. He can also give a fair estimate of the volume expected, lead times for production and payment history. Much of this information will come from ‘the grapevine’, but a good salesman will be able to determine which information is likely to be correct.

The accountant, working closely with the management, will know the volume necessary to break even at the current price levels, and will also know how much volume is necessary to reach the desired profit. Sometimes, the success of reaching these goals is to have a good ‘overhead account’ with enough steady volume to cover most of the fixed overhead, thus giving more leeway to fill the rest of the plant with very profitable business. But sometimes the exact opposite is needed because of specialized techniques or machinery. In these situations, it will be necessary to work with a lower volume but higher margin accounts.

For more tips, try my article on accounting principles.

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