1. Course Title

2. Planning for Profits – Budgeting Essentials Lori Supinie President Senseney Music, Inc.

3. Session Agenda What is a budget? Why prepare a budget? Where do I start? How do I carry out the process? How do I use the budget?

4. What is a Budget? A set of financial statements showing the expected results for a future period. Expresses targets, goals, or limits. Establishes control of operations. Basis for evaluating performance.

5. What is a Budget? A PLAN FOR PROFITS “You can’t build a house without a blue print; similarly you can’t make a profit if you don’t plan for it.” Alan Friedman “Hope is not a plan.” Andy Supinie

6. Why Prepare a Budget? Quantifies goals Provides a yardstick for measuring success Relieves lack of direction Communicates priorities to personnel Financing requirements Credibility

7. Why Prepare a Budget? According to my banker: 50% of clients prepare a budget 75% of those who do actually use it “Those who do prepare a budget are the most successful companies. Benefits include input from all employees and more effective allocation of discretionary expenses, such as advertising.”

8. Why Prepare a Budget? According to Alan Friedman, CPA: 30-35% of clients prepare an annual budget 10% of music industry clients prepare an annual budget “There is ABSOLUTELY a correlation between those clients who prepare and use budgets and their success and stability. If nothing else, there are fewer surprises at year end.”

9. Where do I start? Scope: What is the format of the budget? Done on an annual basis. Divide year into quarters, months even better. Divide total store operations into departments or broad product categories.

10. Budgeted Income Statement Southwinds Music, Inc. Assume a Goal of $480,000 Annual Accessories Sales

11. Budgeted Income Statement Estimate Sales: Based on last year or prior years Consider the effects of: –Inflation / Deflation –New products/markets or discontinued ones –Marketing/promotional efforts –Overall economic factors Experience and best judgment

12. Budgeted Income Statement Spread the annual sales goals to quarterly (or monthly) goals:

13. Budgeted Income Statement Estimate Cost of Goods Sold: Express as a percentage of sales Consider effects of changes in: –Vendors and vendor discounts –Master orders –Freight in – Competitive pressures

14. Budgeted Income Statement Assume 60% Cost of Goods Sold

15. Budgeted Income Statement Estimate Other Revenues: Lessons / Studio Rent Workshop Income Finance Charges Shipping & Handling Charges Repair

16. Budgeted Income Statement Estimate Other Revenues:

17. Budgeted Income Statement Estimate Expenses: Allocate expenses to departments or product categories according to some activity measure such as: –Square footage (occupancy) –# of employees / usage (communications) –Time (salaries) –Direct attribution (contract labor)

18. Expense Allocation Southwinds Music Total StoreAccessories Dept. Sq. Feet Area10,000 2,500 # of Employees 25 5 selling 3 nonselling* Advertising$75,000 $15,000 ** * Non-selling employees spend an average of 40% of their time doing activities related to accessories. ** Determined by estimating advertising/promotional event costs plus allocating such store-wide expenses as yellow page advertising.

19. Expense Allocation Southwinds Expenses to be Allocated: Total StoreAccessories Dept. Occupancy (sq. ft) $100,000 $25,000 Communications (# of empl) 25,000 5,000 Selling Salaries (time) 200,000 80,000 Non-selling Salaries (time) 50,000 20,000 Taxes/Benefits (10% of salaries) 25,000 10,000 Advertising (direct) 75,000 15,000 Workshop Clinicians (direct) 10,000 4,000 Other Expenses (sq. ft.) 80,000 20,000 Total $565,000 $179,000

20. Expense Allocation Spread allocated expenses across quarters:

21. Budgeted Income Statement Finally, figure Net Profit per quarter:

22. Now What? Sales Forecast  Budgeted Income Statement Can be used for “What if?” analysis Compare to Actual Performance on a regular basis – what caused the variances? Maintains the focus on goals, not on past history Controls expenses, especially salaries and advertising.

23. Compare to Actual

24. In Conclusion: Budgeting can provide you with: A yardstick for measuring success Control over expenses A sense of priorities, direction A quantifiable way to communicate your goals to your employees. A plan for profits.