How to Develop Expense Budgets

After a realistic forecast has been developed for sales and gross profit, expenses for the coming year must be estimated in order to establish expense budgets and to determine expected operating profit.

Comparisons

As with the forecast of sales and gross profit, expense estimating begins with a review of the current year's performance based upon comparison with the following indicators:

Performance in prior periods

Industry averages

Objectives established for the current year

For purposes of comparison, it is often useful to express each expense as a percentage of total sales.

Comparing Variable Expenses

The use of percentages as a basis of comparison and forecasting is particularly applicable when analyzing variable expenses. Variable expenses are those that tend to change as a result of changes in sales volume. For example, if salesmen's commissions are based upon a percentage of sales, the total dollar amount of commissions earned would increase as sales increase. If sales in a month were 20% higher than expected, commissions paid would also increase 20% as a direct result of the higher sales volume.

Comparing Fixed Expenses

On the other hand, fixed expenses are not directly affected by short-term variations in sales volume. Therefore, a 20% increase in the dollar amount of any fixed expense such as salaries or rent would normally be considered unacceptable even if sales for the period increased by 20%. When comparing fixed expense levels with objectives or from one period to another, it is more realistic to make comparisons in absolute dollars rather than in percentages.

As a percentage of sales, rent expense was high in February and low in March. However, this does not indicate that control of this expense was more or less effective in either month. It simply reflects the changes in sales volume. In all three cases, the actual rent expense was 1,000.

Long-Range Considerations

Despite the shortcomings of using percentages to evaluate fixed expense control within the business from month to month, they can be useful when making long-term comparisons or comparisons with industry averages. These averages normally express expenses as percentages of sales, regardless of whether they are fixed or variable.

For example, assume that a business found that its rent expense as a percentage of sales was 2% compared with an industry average of 1%. This differential would have to be offset by better than average performance in gross profit or other expense classifications if the business expects to realize net profit equal to its industry average. Perhaps the reason for the high percentage is due to an exorbitant rental expense, or it may be caused by inadequate sales. In either case, certain questions must be answered. These could include the following:

Are we renting more space than we need?

Is our space too expensive for our requirements?

Could a less elaborate facility be located that would be adequate for our needs?

Would a less costly location be sufficient?

Is our space utilization inefficient?

Will expected sales increases be handled without renting additional space? Will this bring our rent expense percentage in line with the industry?

Can the terms of our lease be re-negotiated?

Similarly, when comparing long-term performance with prior periods, the use of fixed expense percentages can be helpful. For example, if you found that warehouse salaries jumped from 2% of sales to 4%, a number of important questions would be raised. These could include the following:

Are we now using too many warehouse personnel?

Are warehouse personnel less efficient?

Has ineffectiveness crept into the warehouse layout or operating procedure?

Are warehouse workers overpaid?

Is warehouse supervision inadequate?

Identifying Excessive Expenses

At Western Appliances, no objectives were available for XXX2 performance. Therefore, excessive expenses can be identified only by comparison with XXX1 results, and, in some cases, with industry averages.

Industry Average Comparisons

Comparisons with industry averages are not available in all of Western Appliances' expense accounts. However, this can be determined by examining those accounts on the company's income statement that can be combined for comparison with industry averages. For example, the industry averages show that office salaries for the industry were 4.9% of sales. Examining the operating expense accounts at Western Appliances, the accounts that would appear to fall into this classification are the following:

Salary - Office Manager 1.4%

Salaries - Clerical 1.0%

Salaries - Warehouse 1.8%

The total of these expenses, 4.2% of sales, compares favorably with the industry average of 4.9%.

Comparison with Previous Periods

The information permits comparison of all expenses in XXX2 with XXX1 results.

The only variable expense at Western Appliances in XXX2 is salesmen's commissions. These represented 2.0% of sales in both XXX1 and XXX2. Therefore, they would not appear to be excessive.

In the fixed expense accounts, sharp increases could be noted in the following accounts and would warrant review and possible corrective action.

Comparing Western Appliances' XXX2 fixed expenses with its experience in XXX1, significant increases are noted in almost every account. Some of these increases should be regarded with more concern than others and therefore given prompt attention. Reasons for the increases and possible corrective action must be determined.

Some increases were probably unavoidable, having been dictated by contract, legal requirements, or price increases beyond the company's control. Others could probably be reduced with closer control. For example, travel and entertainment expense jumped from $10,000 to $13,000, an increase of $3,000. This sharp increase should indicate that a closer look at all travel and entertainment expenditures is in order to determine whether or not all were necessary. Could some have been avoided by restricting salesmen's expense accounts? Could more economical means of travel have been used? Could the company eliminate unnecessary trips that resulted in costs far beyond any real value to the business?

Supplies expense doubled from $1,000 to $2,000 although the volume of business increased by only about 10%. This sales increase would not seem to indicate a need for such a sharp increase in supplies usage. Such an expense could be controlled by closer attention to purchasing procedures and supplies issued to employees, use of less expensive supplies where possible, and so on.

As the owner of Your company you deal with problems on a nearly daily basis. Being familiar with powerful Problem Solving
Techniques can dramatically alter the growth of your small business.

Even though you Find solutions to your issues, many businessmen and women aren't really skilled in the ways of problem solving,
and when solutions neglect, they mistake themselves for misjudgment. The problem is typically not misjudgment but rather a lack of
ability.

This manual Instructs you in some problem solving processes. Critical to the success of a business faced with problems is the
understanding of what the problems are, setting themfinding solutions, and picking the best answers for your scenarios.

What's a problem. A problem is a situation that poses difficulty or perplexity. Issues come in many shapes and dimensions. For
example, it may be:

Something did Not work as it should and you also do not understand why or how. Something you will need is unavailable, and
something must be found to take its place. Workers are undermining a brand new app. The marketplace isn't purchasing. What do you
do to live? Clients are complaining. How do you handle their complaints?

Where do Problems come from? Problems arise from each aspect of human and mechanical purposes as well as in nature. Some problems
we cause ourselves (e.g., a hasty choice was made and the wrong individual was selected for the task ); other problems are caused
by forces beyond our control (e.g., a warehouse is struck by lightning and burns ).

Problems are a Natural, regular occurrence of lifestyle, and in order to suffer less from the tensions and frustrations they
cause, we must find out how to manage them in a reasonable, logical manner.

If we accept The simple fact that problems will appear on a regular basis, for many different motives, and by an assortment of
resources, we could: learn how to approach problems from an objective standpoint; find out how to expect some of these; and stop
some of them from getting larger problems.

To accomplish This, you have to learn the procedure for problem solving. Here, we will teach you in the fundamental procedures of
difficulty. It is a step by step manual that you may easily follow and exercise. Since you follow this manual, you will eventually
develop some tips of your own that work in concert with the problem-solving procedure described in this guide.

Keep in mind, Though, as you see this isn't a comprehensive evaluation of the art of problem-solving but rather a sensible,
orderly, and simplified, yet effective, way to approach problems considering the limited time and advice most company owners and
managers possess. In addition, some issues are so complex that they need the further aid of specialists in the area, so be
prepared to accept that a number of issues are beyond one individual's ability, ability, and desire to succeed.

In order to Appropriately recognize the problem and its causes, you must do some study. To do so, simply list each of the
preceding queries in checklist form, and maintaining the checklist handy, go about gathering as much information as you possibly
can. Keep in mind the relative importance and urgency of the issue, as well as your own time limitations. Then interview the
people involved with the problem, asking them the questions on your own checklist.

After you've Gathered the data and assessed it, you'll have a pretty clear understanding of the problem and what the significant
causes of the problem are. At this point, you can research the causes farther through monitoring and additional interviewing. Now,
you should outline the problem as briefly as possible, list all of the causes you've identified, and record all the regions the
problem appears to be affecting.

Now, You are ready to assess your comprehension of the problem. You've already identified the problem, broken down it into each of
its aspects, narrowed down it, done research on it, and you're avoiding typical roadblocks. On a huge pad, write down the problem,
including each of the variables, the areas it affects, and what the effects are. For a better visual understanding, you might also
want to diagram the issue showing cause and effect.

Study what you Have written down and/or diagrammed. Call in your workers and discuss your analysis together. Based on their
feedback, you may decide to revise. Once you think you completely understand the causes and consequences of the issue, summarize
the issue as succinctly and as simply as possible.

Proceed through your Long list of solutions and cross-out those who obviously will not work. Those ideas are not wasted because
they influence on these ideas that stay. In other words, the very best ideas you pick may be revised based on the ideas that
wouldn't work. With the rest of the solutions, use what's called the"Force Field Analysis Technique." This is basically an
analysis technique that breaks the solution down to its positive effects and negative outcomes. To do this, write each solution
you are considering on a different piece of paper. Below the solution, draw a line vertically down the center of the newspaper.
Label one column benefits and one column downsides.

Now, some more Analytical thinking comes in to play. Analyzing each facet of the solution and its influence on the issue, list
each of the benefits and disadvantages you may think of.

One way to help You think of the advantages and disadvantages would be to role-play each solution. Call in a couple of your
employees and perform out each solution. Ask them for their reactions. Based on what you see and on their opinions, you will get a
clearer idea of the advantages and disadvantages of each alternative you are considering.

Once you Complete this procedure for each solution, pick those solutions which have the Most advantages. At this point, you ought
to be considering only two or three.

 robotics roll-off-dumpster roofing salvage-yard sandwich-shop sausage-making scrap-metal screen-printing scrub-uniform scrunchie self-storage semi-truck sewing shipping Container sign-making silver sip-and-paint skateboard skating-rink skid-steer skin-care-products skip-bin slot-machine small-bbq small-eatery smartphone snack-food snake-breeding sneaker sneaker-cleaning snow-plow snow-removal social-media-marketing sock sound-system spare-parts specialty-food spiritual sports sportswear spray-tan sprinter-van-expedition stationary sticker stock-market storage-unit stucco subscription-box sunglasses swap-meet sweepstakes sweet-shop