The Abacus — Establishing a Bottom Line / Profit First
By Admin

May 13, 2010

For the majority of Americans and businesses for that matter, living paycheck to paycheck has been the status quo for as long as they can remember.  Nothing left over at the end of the week or month to sock away for a rainy day.

Last week, I wrote about the benefits of having a budget for your business.  Well, that’s all well and good, but what does a budget look like?

Let’s begin by starting at the bottom.  Most authors of fiction typically know the beginning and ending of their story.  Then they work out the details of the middle through endless cups of coffee.  The bottom is the business’ net profit.  Wow, that is a novel idea.  I haven’t heard that word in awhile.  Profit!  I LIKE the sound of that.

What would you like to make at the end of the year or month?  Budget it then.  If you are just starting a budget and profits haven’t been part of your normal vocabulary recently, then start small.  If you know what your revenue is going to be, make profit 2 or 3% of whatever your revenue is then.  That’s where knowing the beginning of the story comes in handy.

Here’s why developing a bottom line/profit first is so crucial.  Typically, in developing a budget we’ll find ways of spending every last dollar that we forecast earning.  Let the bottom line be the little white angel on your right shoulder telling you that we just can’t spend that much on advertising or cellular phones this year.

What can you do with profits at month or year end?  Well, dividends to the owner(s) are always nice.  If you are feeling somewhat generous, a lump contribution to the company’s 401(k) could be something to motivate the troops.  Once you have that 2% profit in place, tell your managers that we want to make 4% profit the following year.  Give them a vested interest in making this happen by setting up a possible bonus structure.  Of course, saving that extra profit for that aforementioned rainy day can never be frowned upon.

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1 COMMENT
  1. I understand how this can work for a business but creating a budget for myself is just too confusing. I get what goes in then what comes out but how do you plan? How can I create a budget for myself?

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