Course Title

Planning for Profits – Budgeting Essentials

Lori SupiniePresident

Senseney Music, Inc.

Session Agenda

• What is a budget?• Why prepare a budget?• Where do I start?• How do I carry out the process?• How do I use the budget?

What is a Budget?

• A set of financial statements showing the expected results for a future period.

• Expresses targets, goals, or limits.• Establishes control of operations.• Basis for evaluating performance.

What is a Budget?

A PLAN FOR PROFITS

“You can’t build a house without a blue print; similarly you can’t make a profit if you don’t plan for it.” Alan Friedman

“Hope is not a plan.” Andy Supinie

Why Prepare a Budget?

• Quantifies goals• Provides a yardstick for measuring success• Relieves lack of direction• Communicates priorities to personnel• Financing requirements• Credibility

Why Prepare a Budget?

According to my banker:50% of clients prepare a budget75% of those who do actually use it

“Those who do prepare a budget are the most successful companies. Benefits include input from all employees and more effective allocation of discretionary expenses, such as advertising.”

Why Prepare a Budget?

According to Alan Friedman, CPA:30-35% of clients prepare an annual budget10% of music industry clients prepare an annual budget

“There is ABSOLUTELY a correlation between those clients who prepare and use budgets and their success and stability. If nothing else, there are fewer surprises at year end.”

Where do I start?

Scope: What is the format of the budget?• Done on an annual basis. • Divide year into quarters, months even

better.• Divide total store operations into

departments or broad product categories.

Budgeted Income Statement

Southwinds Music, Inc.

Assume a Goal of $480,000 Annual Accessories Sales

Budgeted Income Statement

Estimate Sales:

• Based on last year or prior years• Consider the effects of:

– Inflation / Deflation– New products/markets or discontinued ones– Marketing/promotional efforts– Overall economic factors

• Experience and best judgment

Budgeted Income Statement

Spread the annual sales goals to quarterly (or monthly) goals:

Southwinds Music - Access. Dept.2012 Budgeted Income Statement

Qtr 1 Qtr 2 Qtr 3 Qtr 4 TotalSales 110,000$ 85,000$ 160,000$ 125,000$ 480,000$

Budgeted Income Statement

Estimate Cost of Goods Sold:

• Express as a percentage of sales• Consider effects of changes in:

– Vendors and vendor discounts– Master orders– Freight in– Competitive pressures

Budgeted Income Statement

• Assume 60% Cost of Goods SoldSouthwinds Music - Access. Dept.2012 Budgeted Income Statement

Qtr 1 Qtr 2 Qtr 3 Qtr 4 TotalSales 110,000$ 85,000$ 160,000$ 125,000$ 480,000$

CGS 66,000 51,000 96,000 75,000 288,000

Gross Margin 44,000 34,000 64,000 50,000 192,000

Qtr 1 Sales X .60

Budgeted Income Statement

Estimate Other Revenues:

• Lessons / Studio Rent• Workshop Income• Finance Charges• Shipping & Handling Charges• Repair

Budgeted Income Statement

Estimate Other Revenues:Southwinds Music Access. Dept.2012 Budgeted Income Statement

Qtr 1 Qtr 2 Qtr 3 Qtr 4 TotalSales 110,000$ 85,000$ 160,000$ 125,000$ 480,000$

CGS 66,000 51,000 96,000 75,000 288,000

Gross Margin 44,000 34,000 64,000 50,000 192,000

Workshop Income 1,000 2,000 2,000 3,000 8,000

Operating Margin 45,000 36,000 66,000 53,000 200,000

Budgeted Income Statement

Estimate Expenses:

Allocate expenses to departments or product categories according to some activity measure such as:– Square footage (occupancy)– # of employees / usage (communications)– Time (salaries)– Direct attribution (contract labor)

Expense AllocationSouthwinds Music

Total Store Accessories Dept.

Sq. Feet Area 10,000 2,500# of Employees 25 5 selling

3 nonselling*Advertising $75,000 $15,000 **

* Non-selling employees spend an average of 40% of their time doing activities related to accessories.

** Determined by estimating advertising/promotional event costs plus allocating such store-wide expenses as yellow page advertising.

Expense Allocation

Southwinds Expenses to be Allocated:

Total Store Accessories Dept.Occupancy (sq. ft) $100,000 $25,000 Communications (# of empl) 25,000 5,000Selling Salaries (time) 200,000 80,000Non-selling Salaries (time) 50,000 20,000Taxes/Benefits (10% of salaries) 25,000 10,000Advertising (direct) 75,000 15,000Workshop Clinicians (direct) 10,000 4,000Other Expenses (sq. ft.) 80,000 20,000

Total $565,000 $179,000

Expense Allocation

Southwinds Music Access. Dept.2012 Budgeted Income Statement

Qtr 1 Qtr 2 Qtr 3 Qtr 4 TotalSales 110,000$ 85,000$ 160,000$ 125,000$ 480,000$

CGS 66,000 51,000 96,000 75,000 288,000

Gross Margin 44,000 34,000 64,000 50,000 192,000

Workshop Income 1,000 2,000 2,000 3,000 8,000

Operating Margin 45,000 36,000 66,000 53,000 200,000

Expenses: Salaries - Direct 20,000 18,000 25,000 17,000 80,000 Salaries - Nonselling 5,000 5,000 5,000 5,000 20,000 Taxes/Benefits 2,500 2,300 3,000 2,200 10,000 Advertising 3,000 3,000 5,000 4,000 15,000 Communications 1,250 1,250 1,250 1,250 5,000 Occupancy 6,250 6,250 6,250 6,250 25,000 Workshop Clinicians 500 500 2,000 1,000 4,000 Other Expenses 5,000 5,000 5,000 5,000 20,000

Total Expenses 43,500 41,300 52,500 41,700 179,000

Spread allocated expenses across quarters:

Budgeted Income Statement

• Finally, figure Net Profit per quarter:Southwinds Music Access. Dept.2012 Budgeted Income Statement

Qtr 1 Qtr 2 Qtr 3 Qtr 4 TotalSales 110,000$ 85,000$ 160,000$ 125,000$ 480,000$

CGS 66,000 51,000 96,000 75,000 288,000

Gross Margin 44,000 34,000 64,000 50,000 192,000

Workshop Income 1,000 2,000 2,000 3,000 8,000

Operating Margin 45,000 36,000 66,000 53,000 200,000

Expenses: Salaries - Direct 20,000 18,000 25,000 17,000 80,000 Salaries - Nonselling 5,000 5,000 5,000 5,000 20,000 Taxes/Benefits 2,500 2,300 3,000 2,200 10,000 Advertising 3,000 3,000 5,000 4,000 15,000 Communications 1,250 1,250 1,250 1,250 5,000 Occupancy 6,250 6,250 6,250 6,250 25,000 Workshop Clinicians 500 500 2,000 1,000 4,000 Other Expenses 5,000 5,000 5,000 5,000 20,000

Total Expenses 43,500 41,300 52,500 41,700 179,000

Net Income 1,500 (5,300) 13,500 11,300 21,000

Now What?

Sales ForecastBudgeted Income Statement

• Can be used for “What if?” analysis• Compare to Actual Performance on a regular basis –

what caused the variances?• Maintains the focus on goals, not on past history• Controls expenses, especially salaries and

advertising.

Compare to ActualSouthwinds Music 2012 Sales Forecast Compared to Actual

Budget ActualQtr 1 Qtr 1 Variance

Sales 110,000$ 105,000$ (5,000)$

CGS 66,000 64,050 (1,950)

Gross Margin 44,000 40,950 (3,050)

Workshop Income 1,000 1,200 200

Operating Margin 45,000 42,150 (2,850)

Total Expenses 43,500 42,500 (1,000)

Net Profit 1,500 (350) (1,850)

In Conclusion:Budgeting can provide you with:

• A yardstick for measuring success• Control over expenses• A sense of priorities, direction• A quantifiable way to communicate your goals to

your employees.• A plan for profits.