Budgets

HF_Blog_018_Budgets

I don’t even want to think about what it must’ve been like, trying to run a business 50 years ago. Think about how much easier it is now. Today you can get online and look up the benchmarks for publicly traded companies with a few clicks of the mouse. You could go on Google right now and find out how your company compares to competitors, research trends and see where your business stacks up.

Then you’ve got great sites like Bizminer, a huge financial information aggregate that, for a fee, gives you the kind the information that business owners 50 years ago would’ve killed for.

If you’re looking for another resource, check out your competitors on LinkedIn. Or even better—you might be shocked at how much they’re willing to talk about if you just ask.

What all this boils down to is getting your business’s benchmark so you can sit down and figure out a budget.

The following excerpt is from my new book, “Uncomplicate Business: All It Takes Is People, Time, and Money.” The book comes out in October 2015 and is available for preorder at HowardFarran.com.

 

Excerpt: Many businesses operate under the formula, cost + profit = price. If each tomato costs one dollar to produce, and the producers want a one-dollar profit, then they set the price of each tomato at two dollars.

This is a formula for failure.

What if they can’t sell any tomatoes at two dollars? They end up going out of business.

In business, you set the price first. Determine the price at which your product will sell, subtract your profit, and now you have a budget.

Price – profit = budget.

So if I sell the tomatoes in the market for one dollar and I make a 10 percent profit margin, I have a budget of ninety cents. If I can’t bring my tomatoes to market for ninety cents, then I don’t have a business, because tomatoes are selling for one dollar.

The goal is to stay within the parameters of the benchmark percentages when you build a budget.

Price is a very important variable in business. This is where the term price elasticity comes from. Price has a very elastic effect on demand. The higher the price, the less you will sell; the lower the price, the more you will sell. In fact some business people consider “price” as marketing. Want to sell a lot more furniture (like IKEA) or plane tickets (like Southwest Airlines)? Just lower your price! That low price could be the best marketing you’ve ever had! The low prices Southwest Airlines can offer by having a low-cost structure is that company’s best marketing tool. Of course they spend money on television commercials and billboards touting their low prices, but you know what lets most people know about Southwest Airlines? Word-of-mouth referrals from happy customers!

You need to determine the price of your product and you need to make a profit. You cannot build a high-quality Mercedes-Benz and sell it for the price of a Chevrolet or you will go bankrupt. …

Again, benchmarking enables you to see what others in your industry are doing so you have a basis for determining consumer demand in your market and the price points for your products and services.

There’s not a single publicly traded company on the Standard & Poor’s 500 index that doesn’t have its budget in place for the entire year at least a month before the year begins. Every successful business starts with a budget. Create a budget at the start of your business and put it in writing. Overlook that step and there’s no point in starting a business at all.

Remember, work like no man has for a decade and you can reap like no man has for the rest of your life.

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