Bottom-up budgeting can do wonders for keeping your business on track and seeing overall profits increase.
When you hear bottoms up, what comes to mind? We are not taking about guzzling down a cold beer! What are we talking about?
The idea is to create a budget from the bottom, rather than the top. Usually we start with revenue and move down the line. With this method you will be deciding how much you personally want to earn as the owner, then what Gross Profit you want your company to earn, and then creating the budget around that.
I just recently learned about this method from one of my clients who asked me to look into it. As soon as I studied up on it, I created a bottom-up budget for my own business and I saw with added clarity what my budget should look like.
What Should Be Included
Here are the key 6 items that should be included on your budget. Review the sample below as you go through these 6 items.
- Owners salary – be realistic! How much do you need to take home to support you and your family. Is it a “reasonable wage” for your industry?
- Cost of Good Sold – All expenses consumed by a project – Materials, subs, labor, and other general costs. You will need to review your financials to decide on the right amount to put here. A good method is to use the percentage of income from your profit and loss statement, based on your history. As an example, remodelers would want a percentage no higher than 70% in order to attain a 30% gross profit.
- Labor Burden – It’s so easy to forget that employees cost way more then their hourly rate. Labor Burden includes all expenses related to that field employee. holiday pay, bonus pay, taxes, workers compensation, cell phone expenses, vehicle allowances, and so on. NOTE: While # 2 and 3 are separate items, I lump them together on the spreadsheet and this gets included in the total, with the goal of 70% or less (see link below).
- Overhead expenses – This is everything not directly tied to jobs. Think of it this way, if your company had no work right now, what expenses would it still have? My suggestion – don’t complicate this. If the expenses weren’t included above, include them now.
- Variable costs – This is for expenses that are a bit unusual or that you don’t generally see every month. A good example is your marketing campaign that you may be running.
- Estimated revenue – Now below this add in a spot for your estimated revenue.
What To Do Next
Does reading this make you want to whip out your financial statements and get to work? Good! Do it right now while it’s fresh on your mind. Download the free Bottom-Up Budgeting spreadsheet HERE.
Analyzing Your Budget
Does it cover your budgeting expenses? Would your company still be making a profit? Are the percentages in line with your industry or history of your company? Go back and adjust your budget as needed. A good benchmark for Remodeling Contractors is 30%, are you meeting this mark or can you adjust your budget to hit this mark?
I created this article and attached spreadsheet based on my experience of working with several contractors over the years. If you have suggestions or tweaks you think the spreadsheet could use, please feel free to reach out to me.
Need help or feeling overwhelmed with where to start? Reach out to me at firstname.lastname@example.org and I can help you get started.