What Are Some Of The Formulas Needed For A Budget?

What are some of the formulas needed for a budget? There are definitely certain formulas like labor to revenue or sales expense to revenue ratios. There are definitely certain formulas like labor to revenue...

There are definitely certain formulas like labor to revenue or sales expense to revenue ratios. Those kinds of ratios are very helpful once you are in established business. You know what those ratios were last year and what you want to do is try to improve on those ratios in the coming year. If you can improve them in your budget there is a chance you will improve them in reality. The larger companies typically have not only the data but also the goal in mind as to how much they want those ratios to change. They may want to reduce inventory or they may want to receivables or they may want to reduce cost of sales, which is a percent of revenue.


In most large organizations they have not only their own experience, but they learn about other businesses in the same industry. They would like to improve their ratios over what their competitors are doing. So if a competitor has a lower cost of sales to revenue ratio then that means we are spending more money on selling our product than the other competitor and we need to fix that. We need to find out what are they doing better and sometimes you hire a research firm to get you numbers, but most larger industries have published ratios.




For the entrepreneur who is starting out, there are a couple of reference books where you can look up these kinds of ratios for businesses in your industry. One is called the Robert Morris Associates Manual and it's published annually. Another one is Dun & Bradstreet. They take their clients' data on an annual basis and crunch the numbers and then they will show all of the pertinent ratios. They show an enormous amount of data about each industry. Let's say we are talking about a flower shop, you could look up flower shops in one of those books and it will tell you what the high, low, and average is for any one of those ratios, whether we're talking accounts receivable, whether inventory returns, or percent of labor to sales. Almost everything is tied to sales or revenue dollars because that gives it a basis that you can use to measure than against your own.

The entrepreneur who is starting out needs to look at those numbers to see where he is in the range. If he is either spending too much money or doesn't have enough sales, then he needs to rethink what he is trying to do. The disadvantages to that data is that it's usually about two years old, but it is a good basis for at least checking your ratios once you have been in business awhile. You can pick the ones that you feel are more important to your industry and your business and you can then create your own history and try to improve year to year.

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