One of the most overlooked and under-practiced habits in today’s businesses is creating annual profit and loss budgets. But why is this so critical for your business?

With a profit and loss budget, you’ve considered and developed an understanding of the key areas in your business that really make your profit and loss come to life.

Let’s take a look at the core components of your profit and loss budget and how they relate to your business:

Sales income

Your sales income figures reflect your business’ ability to:

• generate the right number and type of leads (a function of marketing)

• keep existing customers (a function of sales, team, delivery of your product or service and business strategy in terms of pricing and offerings)

• create new customers from leads generated (a function of sales)

• have a clear strategy for the number and type of income streams and what percentages each contributes (a function of business strategy).

COGS and gross profit

Your Cost of Goods Sold (COGS) and gross profit figures reflect your business’ ability to:

• quote effectively (a function of sales, specifically estimating)

• complete jobs within budget and on time (a function of delivery of your jobs)

• ensure proper pricing (a function of both strategy and sales)

• have visibility of true gross margins and profits (a function of finance)

• allocate labour and materials to the correct jobs and income categories within your P&L (a function of finance).

Fixed expenses

Your fixed expenses figures reflect your business’ ability to:

• forecast the non-variable running costs (a function of both finance and admin)

• forecast wages; I suggest recording non-billable wages in expenses and billable labour (employed and subcontracted) in COGS (a function of finance)

• create and effectively execute a marketing budget and plan (a function of marketing).

Net profit

Your net profit figures reflect your business’ ability to:

• to do all of the above items successfully (a function of leadership, team, systems and strategy)

• to estimate what your true capacity is (a function of leadership, strategy, team and finance).

Your leaders need to have the ability to understand which areas of your business affect the various areas of your profit and loss and which team members have responsibility for producing results and outcomes within those areas.

They must have a solid tactical and strategic plan for their team to implement to realise these results and outcomes.