Budgeting for success

Nov. 1, 2011

Hard to believe it’s fall already and time to think about your 2012 business budget. Or are you one of those tire dealers who doesn’t do budgets? Sadly, there are many dealers like that.

Budgeting may be the most important management exercise that every successful store owner does all year. Without budgets, a business will be like a ship without a rudder. Budgets help all businesses stay on the course to better profitability. After all, isn’t this why we are in business?

Excuses, excuses, excuses

Many tire dealers ignore budgets because they don’t have the time to create them. Typically, store owners are working so hard “in” the business, they don’t make time to work “on” the business.

Many plan to ask their bookkeeper to throw one together if their banker asks if they have a budget. And many tire dealers who say they prepare a budget just copy last year’s numbers and hope to be able to beat them.

Either of these actions, of course, would be a wrong approach to preparing a successful budget for next year. Think about it, all successful companies, large or small, do budgets. That’s why they are successful!

Simple steps to getting started

Maybe now you are starting to ask if a budget makes sense for your business. You’re wondering:

• How do you start?

• How long will it take?

• Who should help?

• Should you involve your people?

• Where do you get the information to prepare a budget?

These are all good questions, so let’s try to answer them. In order to get started, I suggest that you find a day or evening when you won’t be interrupted by phone calls, customers or employees. Budgeting requires you to be able to think about what you believe will happen to your business next year.

Another way to look at a budget is to think of it as a plan or a road map to your business success. You would not think of driving 800 miles without a map or GPS. Budgets are the same thing — they offer directions.

Step one: Start by getting last year’s financial statements by month.

Yes, I said by month. Some people do a budget showing the whole year in one column. While this is better than not doing a budget at all, it will not help you to compare your results by each month.

Now that you have last year’s profit and loss statement by month, I suggest that you start by trying to do a budget for January. The best way is to have your bookkeeper set up a spreadsheet inserting last year’s actual numbers (see Chart #1).

Notice we have captured as much detail as possible so we can identify and manage any area that does not meet our budget forecasts. Now, ask your bookkeeper, store manager and anyone else who is in a management role with your company: What has happened to our company since last January?

• Is the economy still soft?

• Have we lost a large customer?

• Did we lose a valuable employee?

• Will the city be working on the street in front

   of our store?

• Did we gain a large customer?

• Has the employment rate improved?

• Do we have any new lines or services to offer?

All of these questions will impact what your revenue and profits will be for each month next year. Once you know all of the answers, you are ready to start to put the numbers on paper. Start with sales by category by putting down how much you will do in tires, labor, alignment, parts, oil, shop supplies and so on (see Chart #2).

The natural instinct is for you to be aggressive since business has been slow and you want next year to be better. Resist this impulse, put down only the actual numbers you know you will do. Once you complete the sales part of the budget, then you insert the cost of each category. I strongly suggest that you do not show any payroll costs in any of these categories. Put all payroll costs in the section called payroll below the gross profit line. Now subtract the cost by category from sales by category and this, of course, will give you the gross profit by category. Complete the process by putting in the percentages by category. You then calculate the cost by category divided by the sales in that category to determine what the percent of cost is by product.

Finally, you do the same for gross profit by category down to the total. You now know how much gross profit you think you will make for January of next year. The secret, of course, is not to spend more than this amount.

Step two: Anticipate your expenses.

This step will make your accounting people uncomfortable! I suggest you start by doing the payroll for the whole store by category. Again look at Chart #1 and see how we break out the payroll. Ask your bookkeeper to give you the weekly pay for each person with spiffs and bonuses plus the amount of payroll taxes. I suggest that you use this number for your budget. Your current weekly payroll will give you an idea of how much payroll you are paying compared to the gross profit you expect for next year.

Now, instead of using the percent of sales compared to payroll, I highly recommend that you divide each payroll category by the total gross profit. Our goal for payroll divided by total gross profit is to be sure it never goes over 45%. If it is higher this will be an area that you will need to adjust so you can show higher profits.

Step three: Complete every other expense for the month.

I suggest using the most current information unless you know that a given expense will go up next year. For example, rent. If you are paying $8,000 per month but in June it will go to $8,500, then when you do June’s budget show the higher number. After all of the other expenses are posted, then you should get a total of all expenses without payroll. You should now subtract payroll and other expenses from total gross profit to see if you will make a profit for next January. Remember, January and February are usually the two worst months of the year, so don’t panic if you show a loss for these two months.

Step four: Repeat this process for each month for the rest of the year.

Once you have completed the budget for all 12 months, hopefully you will see a profit that satisfies you. If you see a budget that is not to your liking, then the budget is telling you to make changes or you could lose money next year. The good news is this is why we do budgets! The budget says if I continue with these sales and expenses for the next year I won’t like the results, so I have to make some changes.

Resist the temptation to increase sales to fix the problem. Everyone thinks this is the way to do it. You may be able to increase labor rates, which will help, but don’t change your other sales forecast. I strongly suspect that if you and your team did a good job on forecasting sales and gross profit, the problem must be in expenses. No one, I repeat, no one, wants to reduce expenses, but this is the answer to success. Maybe for the first time since you have been in business you are going to be forced to look at this problem: “I must cut my expenses.”

Step five: Look at payroll.

In my 30 years of consulting to the retail tire industry, I can tell you the problem is almost always in payroll. We seem to want to carry a lot of people to give good customer service even when we don’t have the sales to support them. In the current economic conditions in our industry, sales are very soft. So the questions are:

• Can I afford all of these people?

• Can I afford all of this overtime?

• Can I, as an owner, afford to continue to take out this much salary from the company?

If your budget for next year is not showing the profits you want, it’s probably because your payroll is too high. Once you have determined that you can’t increase sales or gross profit, you must look at reducing payroll costs. If you compare your budget of payroll dollars divided by budget of gross profit dollars and the number is higher than 50%, you have too much payroll. Start by trying to reduce overtime. If your payroll is still too high, you may have to reduce the number of employees.

Step six: Look at your other expenses.

You will find that if you examine each one separately, there is not a lot of room to reduce them. Rent is fixed, utilities are hard to reduce. And even if you get three quotes every year, as you should, it’s hard to get insurance rates any lower.

Are you spending too much on advertising? Are you getting the results from your current programs? Do you measure the results of each advertising and marketing program that you are paying for? Should you continue to be in the Yellow Pages? Is your website up-to-date and effective?

This is the one area that if you are not getting the sales results that you want, then spend less or spend this money on more effective programs.

Step seven: Compare next January actual results to your budget and prior year by month.

I believe that this is the only way for you to look at your profit and loss report each month.

Chart #3 shows last year’s results compared to your budget and finally this year’s results. Your current profit and loss statement may only show the current month and year to date. This is not enough information to run your business. Use Chart #3 every month and you will start to better understand your numbers.

Count your profits

Running a business is very hard, and making a profit is the most important thing in business. If you have never prepared a budget, now is the time to start. It may open your eyes to the potential of making more money just by changing little things in your business. It’s never too early to start making a budget. Start now and watch your profits grow.   

Norm Gaither is president of Dealer Strategic Planning Inc. (DSP), a company that promotes “20 groups” in multiple industries. He is a well-known consultant in the automotive aftermarket and has owned his own firm since 1984.