BUDGETING FOR PROFITS

by Sam Boyer

Save money and make money, the underlying reasons to have budgets.  Budgets are the guideposts equity holders and managers need to drive sales, maintain margins, control expenses, and improve profits.  The budgeting process must begin with management setting goals for the distributorship.  Goals are established within the annual planning process where equity holders and managers discuss and agree upon sales, cost of goods sold, gross profits, expenses, and net income.

Sales goals for the upcoming fiscal year must be established.  This is the first step toward having strong fiscal controls within a distributorship.  Case sales goals for each individual brand should be first determined and then extended by the average per case selling price.  The case sales and average selling price will be impacted by the actions of the suppliers and your competitors.  You may not have all the required information; however, this is no reason not to produce a sales dollar budget.  The total of all brands’ projected sales dollars is your sales budget for the upcoming fiscal year.

A cost of goods sold budget is a necessity.  This budget will also be heavily impacted by supplier actions.  Their decisions concerning what packages will be promoted, the depth of discounts, the length of discounts, and general price increases will affect this budget.  Freight charges are part of this budget and an overlooked profit area.  You must use the case sales budget and compute the number of loads of product you will receive during the year and determine your total freight costs.  Once again, just because you do not have all the information is not a reason to forgo this budget.

Gross profits are the result of sales less cost of goods sold.  Gross profits are in reality the only dollars you have to operate your business and produce a profit.  It is imperative all steps be taken to protect and improve gross profits.  This all-important task includes achieving the sales goals, negotiating lower FOB’s with suppliers, and improving freight costs.  The budgeted gross profits for your distributorship are the result of subtracting the cost of goods sold budget from the sales budget.  Sales dollars, cost of goods sold, and gross profits must be determined for each month of the fiscal year. 

Expense budgets are a must in today’s challenging financial environment.  Even if you do not complete sales, cost of goods, and gross profit budgets you must have an expense budget.  Just comparing this year’s expenses to last year’s is not sound financial management.  Prior to the beginning of each fiscal year the equity holders and managers of a beer distributorship must review all expenses and determine if they will be increasing, decreasing, or eliminating them in the upcoming period.  Controlling expenses has to be a primary function for all decision-makers.  Without expense control your sales growth and margin improvement will be muted.  This management task is perhaps the toughest to address.  Often it involves the number of employees in your firm and/or the programs that are required by suppliers.  However, without expense control your profit goal will not be realized.

Not only must each expense be determined in total for the year, they should also be calculated on a monthly basis.  Some of these expenses, such as insurance and depreciation, can be simply divided by 12 and applied equally each month.  However, other expenses such as payroll must be calculated for each month.  This is necessary to ensure the budget expenses will accurately reflect what is actually going to happen each month.  The more accurate the budget is on a monthly basis the more effective it will be as a management tool.

The total of expenses must be at such a level to ensure an adequate return to the equity holders.  If the needed return is not present, management must revisit the budgeting process and make adjustments.  These adjustments must be realistic.  If adjustments are made just to make the budget “look good”, the managers are only creating a situation that will hamper them later.  You cannot have quality fiscal management if your expense budget is not accurate.

Compiling a budget that falsely predicts an exceptional net income level is poor management.  Employing inadequate tools to build a business will result in an inadequate business.  Your expense budget must be achievable and support ongoing operations.  If you desire a certain percent of sales dollars to flow to net income then your expense budget must reflect this.  If your gross margin is 24.0 percent and you wish to achieve a net income of 4.0 percent of sales, it follows that the operating expense budget must be no more than 20.0 percent of sales.  If your expenses exceed 20.0 percent of sales and you cannot adjust the budget to meet your profit goal you must analyze your entire distributorship, eliminate positions, and reduce expenses.

Reviewing your performance to budget each month is an absolute necessity.  The budgets must be part of your accounting system and printed on a line-by-line basis with the statements each month.  Comparing your actual performance to budget will provide management the information necessary to ensure the planned profits are achieved.  When variances exist between actual results and the budget, management must determine the reason.  Knowing the reasons why variances exist will allow management to adjust expenses.  Without an expense budget to compare to, it will be difficult to make adjustments.  Expense adjustments may be negative, resulting in operating cost reductions in order to maintain the relationship between sales and expenses.  Or these adjustments may be positive; management can through small additional expenses leverage significantly larger increases in sales and profits.  Budgeted expenses can be exceeded if the resulting profit gains exceed the additional expenses.  Budgets are a tool to improve profits; they are not straight jackets.

Comparing performance to your budget is a time sensitive task.  Your accountant must have the monthly statements to you by the 15^th of the following month.  Any later and you will not be able to make the adjustments necessary to achieve your profit goals.  Budgets are a management tool to measure your ongoing performance and if used properly they will improve profits.