Finance: Create budgets to predict outcome

Q. Visiting with the accountant, I don’t know what to expect as I look at the monthly financials. Isn’t there a way to eliminate the surprise?
Monday, April 23, 2012

A. In a word: budget. Every business should be working with 12 budgets which represent the next 12 months. The monthly budget is your prediction of what that month’s income statement is going to look like. Row by row, you are estimating what the numbers will be. You begin with your revenue; estimate your gross margin and every expense.

The accuracy of the budget is determined by your ability to utilize your previous income statements as guidance. Let’s use April as an example. Now is a great time to look at April 2013 as you have just completed the month. To make the job easier, your sales estimate should consider several previous years for April. 

The same should be done for the gross margin. Look at the variety of items you sell: Do you expect to sell more of items with high or low margins? Has your buying improved so that you are increasing your initial margin?

With the expenses, you can make the exercise easier by noting all expenses with a letter “F” or “V,” representing those that are either fixed or variable.

Each expense should also be marked with a “C” or “U.” This represents expenses that are either controllable or uncontrollable. Those expenses that have the “U-F” combination are those you have determined are a set dollar amount each month and are a requirement of the business. Evaluate all other letter combinations for repeating, as well as increasing or decreasing next April.

The visit with the accountant should be to discuss the variation from the budget—both good and bad.

Tom Shay is principal of Profits Plus Solutions. Reach him at or 727-464-2182.