How to Finalize your Organizational Budget

How to Finalize your Budget

We’re finally ready to finalize your organizational budget! That is, once you have completed worksheets for each aspect of your company:

  1. How to Budget Future Sales
  2. How to Budget COGS
  3. How to Budget Fixed Expenses
  4. How to Budget Personnel
  5. Any additional focus areas that are specific to your company

Set up a workbook that integrates all the tabs from your worksheets. Then create a summary tab that is connected to each worksheet. This is important because thus far we have only looked at isolated departments and have not brought it all together for an organizational budget view.

Budgeting for a Net Profit Margin

Org Budget 1st draft

More often then not, the first time you bring all the department budgets together, your company expenses will be break-even or larger than your sales. There are a couple of factors at play here. Your sales team will be conservative in projecting sales goals. Their instinct is to set achievable monthly sales goals, so they always earn their bonus. When looking at budgeted expenses, the opposite is occurring. Each department wants to give themselves room for error and negotiation with prices.

The production team wants leeway when purchasing raw goods and packaging materials. The Marketing team wants as high of an average customer acquisition cost as they can get. Each department will be battling for their self-interest.

Adjusting your Organizational Budget

As the company’s lead, you need to achieve a certain Net Profit Margin. For your reference here is what the Corporate Finance Institute has to say on Net Profit Margin:

A good margin will vary considerably by industry. Still, as a general rule of thumb, a 10% net profit margin is considered average, a 20% margin is considered high (or “good”), and a 5% margin is low.

For this company example, I had to go back to my production and marketing team.

For the production team, we had to collaborate to get COGS underneath 45% of the total sales. It is crucial to keep an eye on your ratios. If you are unable to source your materials at a lower cost, then you must increase prices. We couldn’t find the cost savings alone, so we had to work with the sales team to devise a price increase per SKU to make up the difference.

Next, I had to go to the Marketing team to adjust the per customer acquisition price. Luckily, production and sales were able to devise a strategy to reduce expenses and increase individual sales prices. I only had to ask Marketing to lower their acquisition cost by 0.05.

When all the dust settles, your final budget should look something like this:

Final Budget Image

Conclusion

These final steps are what make creating an organizational budget such a long and arduous process.

Without the collaboration of each department, your organization’s managers may not understand the foundation for the company’s budgeting decisions. When we work together to build department budgets, each department has ownership and an understanding of how their sales or spending targets have been derived.

About the author: Jeanine Hall is the founder of Quant Solutions. As an entrepreneur herself, Jeanine is an active supporter of the startup/entrepreneur ecosystem and enjoys helping others manage and grow their business.

For assistance with your company’s budgets, email hello@quantsolutions.co

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