Budgets! That word can imply a lot to many people—extra work, restrictions (who wants limits in business?!), confusion (where do I start?), and procrastination (who has time at this time of year?)
With all that in mind, for those of you ready to create a budget for 2025, here are some simple guidelines to get started.
Know Your Fixed Costs
The starting point for all budgets is your fixed costs. Review the general expenses on your Income Statement for the past 12 months.
These expenses recur every month, regardless of sales volume, and include items such as:
- Rent
- Insurance
- Office and management salaries and wages (production wages can be treated as part of your cost of goods sold)
- Telephone
- Bank charges
- Vehicle expenses
- Marketing (discretionary, depending on goals)
To determine budgeted fixed costs, analyze your expenses over the past 12 months. Either calculate a monthly average or allocate costs by the month they occur (e.g., $3,000 for June insurance).
Take time to review each expense. Ask:
- Are we getting good value?
- Can we switch suppliers to save money or gain more value?
Know Your Other Balance Sheet Costs
Include additional costs not on the Income Statement, such as:
- Capital expenditures for vehicles, equipment, and technology.
- Principal portions of loan repayments.
- Dividend distributions to owners.
Know Your Gross Margin
Gross margin percentage is critical for determining your break-even sales.
Formula:
- Sales – Cost of Goods Sold (COGS) = Gross Profit
- Gross Profit / Sales = Gross Margin %
Example:
- Sales: $100
- COGS: $40
- Gross Profit: $60
- Gross Margin % = 60% ($60 / $100)
How Much Profit Do You Want to Earn?
Next, determine your profit target for 2025.
Example:
- Fixed costs: $120,000
- Additional costs:
- Dividends: $60,000
- Loan repayments: $10,000
- Capital expenditures: $20,000
- Retained cushion: $60,000
Total costs = $270,000 ($22,500/month)
With a 60% gross margin, break-even sales = $270,000 / 60% = $450,000.
Prove It! Work Backwards
Sales: $450,000
- COGS (40%): $180,000
- Gross Profit (60%): $270,000
- Fixed Costs: ($120,000)
- Net Profit: $150,000 (33%)
Subtract other costs:
- Capital expenditures: ($20,000)
- Dividends: ($60,000)
- Loan repayments: ($10,000)
- Cushion: ($60,000)
- Net: $0
The Final Number – Break-even Sales
Break-even sales are your “magic number.” Allocate monthly targets based on seasonality or divide evenly across 12 months.
Share this target with your team! Post it in meeting rooms and make sure your sales team knows your goals.
In Summary
- Determine fixed costs ($120,000 in this example).
- Add loan payments, dividends, capital expenditures, and cushion ($150,000).
- Know your Gross Margin % (60%).
- Calculate Break-Even Sales ($450,000).
Your break-even sales are your success threshold. Maintain consistent gross margins and control expenses to ensure a healthy business in 2025.
Thanks for reading—here’s to a prosperous 2025!