Customer profitability is measured by subtracting allocated costs from customer revenue.
The trick is to logically allocate costs – specifically Selling, General, and Administrative expenses. Understanding your customer profitability will help you make better decisions. For instance, what new customers to target and which of your current customers to part ways with. Having more good (and less not-so-good) customers will make your life as a small business owner more enjoyable.
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Why is it important to analyze customer profitability?
You’re probably wondering if some of your small business’ customers are unprofitable.
In the back of your mind, you know that some customers are better than others. Some customers are a huge headache and don’t bring in that much revenue. Others are a pleasure to do business with and drive the majority of your revenue.
It’s more than just revenue
Sure, you have an inkling of which customers are good and which are… not-so-good. But until you run the numbers, you’ll never know.
What you find might surprise you. Maybe the customer who’s a huge headache is worth it? Or, maybe the customer who seems ideal is actually unprofitable?
Revenue is the starting point. But customer profitability has as much to do with costs as it does revenue.
Build a better business with a customer profitability analysis
By understanding which of your customers are the most profitable, you can make better decisions in the future.
You will have a measurement to decide if you need to dedicate more time and resources to certain customers. Or, if you need to fire them.
Your “ideal customer” will become clearer. This will allow you to focus your marketing toward other “ideal customers.”
Also, by getting rid of not-so-good customers, you’ll likely save a huge emotional toll on yourself and your employees. Work will become more pleasurable. Which, in turn, can only help you achieve your vision for your small business.
How does a business measure customer profitability?
You know that profit = revenue – expenses. So, customer profit must equal customer revenue – customer expenses.
Customer revenue is easy enough. Your accounting software should be able to provide you with a report that tells you what you sold to who. If not, that’s Job #1 – to piece together this information or start measuring it going forward. You can’t measure customer profitability without it.
If you’re following along in the Customer Profitability workbook, you can enter customer names in row 5 of the Customer Profitability worksheet. Additionally, enter Customer revenue in row 7.
Also, for the sake of consistency, I would advise you to enter a Start and FinishTime period. This goes in cells C3 & D3 respectively. These dates won’t affect any formulas. They will, however, help ensure that your revenue and costs are compared consistently.
Costs of Goods Sold/Cost of Sales
Cost of goods sold (COGS), also known as Cost of sales (COS), are the costs your business (more or less) directly incurred to deliver that product/service to the customer.
Again, your accounting software probably captures this for you in a report somewhere.
QuickBooks Online captures this information in a report called Profit and Loss by Customer. It can be found by navigating to Reports (left menu) > Standard (tab) > Business overview (section).
Here’s what that report looks like when downloaded into a spreadsheet:
Credit: qbo.intuit.com Click to enlarge
Based on how you set up your customers and products/services in QBO, your COGS will automatically be recorded in this report. That’s a big chunk of costs right there! Customer Gross Profit is taken care of.
What if you don’t have a report that totals customer revenue and COGS?
You can estimate these totals with the Customer Rev/COGS (Optional) worksheet. It will just take a little more legwork.
First, list all your Products/Services in column B. Then for each Product/Service list the average Price you sell it for. Also, the average Cost.
Again, I’ll try not to get too technical. “Cost” in this case, includes material, labor, and overhead. The total costs incurred to produce one Product/Service. If you’re unsure whether to include a particular expense, leave it off. It can always be allocated on the Customer SGA Allocation worksheet.
After you’ve listed Products/Services, Price, and Cost, then you’ll want to enter the QUANTITY PURCHASED by each customer.
At the bottom, you’ll see Revenue and COGS by customer summed. These amounts can then be entered on the Customer Profitability Worksheet. They won’t carry over automatically because this worksheet is optional.
With Customer revenue and Customer cost of goods sold entered, Customer gross profit and gross margin will be calculated. Your Customer Profitability worksheet should look something like this:
Click to enlarge
The shading of the Customer gross margin cells will change slightly to highlight those customers with the highest gross margins.
What about Selling, General, and Administrative expenses?
Everything up until this point has been fairly intuitive. This is where the good customers get separated from the not-so-good, though.
Selling, General, and Administrative (SGA) are those expenses that are not directly tied to any individual Product/Service. This is why you don’t see these expenses included in the QBO Profit and Loss by Customer report.
But, these expenses are very real. They are (or, at least, should be) necessary to serve your customers. So, they should be accounted for any time you speak of “profitability.”
How do you allocate these expenses to individual customers though?
You can think of each type of Expense as a pie. It’s up to you to decide on the most appropriate way to slice that pie for each customer. There are no wrong ways to slice that pie. Some are just better than others.
Start by listing Expenses in column B on the Customer SGA Allocation worksheet. Break them down into as much detail as you’re comfortable with.
For each Expense, enter an Amount to be Allocated in column C. Remember to stick to the Time period specified on the Customer Profitability Worksheet. You don’t want to allocate too much or too little.
Drivers – slicing the pie
Now, comes the creative part…
Think about what drives that Expense. Specifically, what the customer does that makes that Expense increase.
For example, Automobile expenses could be allocated by the number of miles driven for a client. Meals and Entertainment could be allocated by the number of meetings and events you took part in with the client.
Again, there are no wrong answers here because there are (usually) no perfect ways to slice the pie. Use your best judgment. If you completely draw a blank, you can always allocate that Expense evenly across all customers.
Try not to do that if at all possible, though. It’s the allocation of these costs that really separates the profitable customers from the unprofitable ones.
Back to the Customer SGA Allocation worksheet.
Enter the method of allocation in column D. Then, for each customer, break the Amount to be Allocated down in that manner. The Total of that breakdown (column O) needs to equal the Amount to be Allocated.
If all of the Totals don’t match, you’ll see an error message in cell P25.
Customer SGA expenses are totaled at the bottom and carried over to the Customer Profitability Worksheet.
Your completed Customer SGA Allocation worksheet should look something like this when you’re done:
Click to enlarge
The final product
If you look back at the Customer Profitability Worksheet, you’ll see that Customer SGA expenses are subtracted from Customer gross profit to give you Customer operating profit. Aside from taxes, this is essentially your bottom line for customer profitability.
Customer operating margin is also displayed. Again, the shading in these cells will change to highlight those customers with the highest operating margin.
A chart, comparing your customers is also included to help with understanding.
Your final product should look something like this:
Click to enlarge
How to improve
Good news! The first step to improving customer profitability is to understand it. After using this workbook, you should have a better understanding of customer profitability.
Next, look for common themes among your best (most profitable) customers. Is there anything they have in common?
How did you acquire these customers? Can you replicate it?
Can you do more business with these customers? You don’t want to grind on your best customers too hard. But, are there any more of their problems you can fix with your solutions?
Don’t just look at your customers either. Look into the mirror a little bit too. Is your company making some customers not-so-good? This might not be comfortable. But, some introspection could help you convert some of those not-so-good customers to the light side.
If some of the not-so-good customers are hopeless though, you might have to fire them. This can be a delicate situation. However, sinking money into customers that you don’t even enjoy dealing with is destructive. Do your homework on the best way to do so and let them be someone else’s problem.
In order to estimate how much in sales your startup can hope for, you’re going to have to estimate the market size for your product/service(s). This is critical for your startup because it will give you an idea of your business’ potential. It will also help you plan for capacity-related issues.
2 approaches to estimating the market size for a business plan
I cover this topic more in-depth in a post on market size and growth rate on my sister site, InvestSomeMoney.com.
The context there is focused on investing your money in a publicly-traded company. Though that’s a little different than what we are doing here, the fundamental principles remain the same.
The goal is to determine how many potential customers there are for a business and how much they are willing to spend. In order to do that, we can employ two general methods. These methods are a top-down analysis and a bottom-up approach to understand market size and growth.
One way to think about this is that a bottom-up approach uses multiplication and a top-down analysis uses division to arrive at an estimated market size.
After writing on this subject several times, I’ve come up with another way to think about these methods. I think a bottom-up approach should look internally, at things like unit size and capacity. A top-down analysis should look externally at things like demographics and market research.
Looking at this from these two different perspectives opens the door for further analysis. When you’re done, you should know whether you can expect to be capacity constrained or demand constrained. You’ll also start to flesh out some ideas that will help you further into your business plan.
If you do an analysis with both approaches, you can compare the results. For instance, if your bottom-up approach is higher, you’ll know that you could have excess capacity issues. You need to consider scaling that back or otherwise expanding your product/service offering to drum up additional demand.
Conversely, if your top-down analysis reveals that demand is in excess of capacity, then you are leaving money on the table. Time to start thinking about what you can do to scale up and capture as much of the market as possible.
Let’s start by taking a look at a bottom-up approach to estimating the market size for a business plan.
Bottom-up approach example
On my sister site, InvestSomeMoney.com, I researched three real-life examples of a bottom up market sizing approach. In those examples, you’ll see that they sometimes mix in a little top-down analysis with their bottom-up approach and vice versa. There’s no rule against doing that, but I would rather look at things from two totally different perspectives.
When using a bottom-up approach, try to start with the most simplistic piece of firm information you can get your hands on. Then, start to build on it with other information, or the best guess you can muster.
You can think of a bottom-up approach as one that focuses on how much and how often customers will buy.
This information might be something you have internally. Or, it might be from the information you found by researching online. Start with a single “serving size” of your product/service. Then, think about how often a customer would buy. Work your way up from there.
There’s still a lot to consider regarding packaging volume and dosage. That will require more thought. But, for the time being, I’m going to estimate the volume of a one month’s supply and the daily dosage to be the same as Rogaine. If that changes as I progress with my business plan, I can easily circle back to this and plug in different numbers.
With Rogaine as my benchmark, I know that a dosage of my product would be 1 mL. The product would be used twice a day. My product would come in 2 oz (60 ml) bottles. Each bottle would be one month’s supply, as I said.
Thinking about capacity
Okay. Now that I have a grasp on the package size – what about blending and packaging? If this idea were to come to fruition, I don’t picture myself blending batches in my bathtub and filling bottles with a ladle and a funnel. I would need access to some sort of industrial equipment.
Fortunately, a quick internet search shows that there is no shortage of contract blenders and packagers out there. Especially for food and supplements. What it costs, remains to be seen. That’s an issue for another time. For now, I just want to get an idea of how much I could manufacture.
This company claims it can blend 1.25 million pounds per workday. We’ll assume, for now, this represents the average contract blender/packager. What does that translate into in terms of 2 oz bottles?
First of all, I wouldn’t need all 26 of their kettles. Only one, tops, especially at startup. So, if we divide the 1.25 million pounds by 26, we get a per kettle capacity of about 48,000 lbs per day.
Pounds are a weight unit of measure (UOM) and ounces are a volume UOM. To make the conversion, we’re going to have to do some more estimating.
Water weighs a little over 8 lbs/gallon. We’ll assume my product has roughly the same density.
8 lbs ÷ 128 oz (per gallon) = .0625 lbs/oz. With each bottle containing 2 oz, we know that it’ll weigh approximately .125 lbs/bottle.
This means that with one of this company’s kettles, I could blend 384,615 bottles worth of product per day. 96.5 million bottles per year. At an approximate sales price of $7.50 per bottle, that translates into nearly $725 million in revenue per year.
Okay, I’ve looked at things from a bottom-up, capacity-focused approach. Let’s now consider a top-down, demographic-focused analysis.
Top-down analysis
Not surprisingly, I also wrote a post on InvestSomeMoney.com with examples of a top-down analysis to determine market size for a business plan. When you read through it, you might notice that some of the examples use Census data (or something similar). They take big chunks of information and start narrowing down their market from there.
Which brings us to three important terms for performing a top-down analysis. These are:
Total addressable market (TAM) Serviceable available market (SAM) and Serviceable obtainable market (SOM)
A SOM is a fraction of the SAM. In turn, a SAM is part of the TAM.
The TAM can be thought of as every potential customer that you can reach geographically. The SAM is what’s left when you niche down a little into the population that is a good fit for your unique selling proposition. Finally, the SOM represents the percentage of the SAM you can realistically expect to take.
It’s unlikely that you will ever capture 100% of the SAM. Even in a specific niche, you can’t be everything to everyone. That’s alright, though. The goal of this exercise is to make realistic estimates so that you have a sound business plan to work from.
When doing a top-down analysis, start with a large population or an overall industry size. From there, narrow down your customer until you arrive at your SOM. It helps to have a “customer avatar” in mind before starting a top-down analysis so you know where to niche down to.
I would suggest you perform a business plan demand analysis first to get a crystal clear picture of what that avatar is. You might think you know it intuitively. But you might be surprised at what you find – like I was!
A top-down analysis for my business plan
I know that not every person in the U.S. (much less the world) is going to want or need an all-natural topical supplement for hair loss. Who might though???
I’ll refer back to my handy-dandy business plan demand analysis (linked above) to see what I can find.
Here, I’m reminded of the ages that men and women first started experiencing hair loss. I’m reminded of the percentage that has sought any sort of treatment. Finally, I’m given an idea of what types of treatment they have tried.
A quick visit to Data.Census.Gov and I find table S0101, which gives me the U.S. population by age and sex. I customize and filter the table real quick. Then, I copy and paste the data I need into my spreadsheet.
Next step is to narrow these numbers down. I’ll use the “regular” numbers and the pessimistic numbers from sensitivity analysis from my business plan demand workbook.
I want to know the percentage of men who have had hair loss and tried any sort of treatment. Then, I want to go deeper and estimate the number that has found supplements to be effective. I’ll do this for both the most-likely and the worst-case scenarios. On the women’s side, I’ll do, more or less, the same thing.
TAM and SAM
You’ll see that I didn’t use the same age ranges for men and women. I assumed that males would start experiencing hair loss earlier, but would also stop caring about it earlier too.
The age range for males in my TAM was 20 – 54. For females, it was 25 – 59. This translates into a TAM of 151 million people in the U.S.
For the SAM, my worst-case scenario estimated that .9% of the male population in the target age ranges would be part of my market. 1.54% of females in the target age ranges were also assumed to be part of my market. This translated into a worst-case SAM of 1.8 million people.
As for my most-likely SAM, I estimated that 1.41% of males and 2.4% of females in the target age ranges were potential customers. This resulted in a SAM of 2.88 million people. Over a million more potential customers.
SOM
SOM is tricky.
Who’s to say what percentage of the SAM my company could capture? Obviously, it would start at 0% and work its way up from there. Where would it stop though?
It will depend, in part, on the number of companies vying for this niche. As I often do, I will refer to the Pareto principle. The Pareto principle states that 20% of the inputs will be responsible for 80% of the outputs. Put another way, 20% of the companies will have roughly 80% of the market share.
I’ll refer back, again, to my post on business plan demand. In it, I found three direct substitutions for my topical hair loss product. I won’t include Minoxidil (Rogaine) in that group, because of its unnatural chemistry.
Again, without getting too mired in math, I estimate that there are approximately thirty companies in the topical hair loss supplement space. This was a quick and dirty estimate based on the results of an internet search.
Six of those thirty companies probably control 80% of the market. That leaves 4.2% (1 ÷ 24) of the remaining 20% as my short-term SOM. Obviously, if my product were to take off, that amount could grow considerably and could approach the SAM.
What that means as far as the market size is 15K people worst-case and 24K people most-likely. At 12 bottles purchased per year, this translates into 184K and 287.5K bottles per year respectively.
Here’s a look at the spreadsheet breaking that all down:
Click to enlarge
Comparing a bottom-up and top-down analysis when determining market size for a business plan
Obviously, a couple hundred thousand bottles (top-down) is a far cry from 96.5 million (bottom-up). So, it would appear I will not be capacity constrained in the near future. In fact, as this startup moves forward, I need to make sure I’m not over-buying capacity. Those huge fixed costs could kill my business before it has a chance to get off the ground.
Speaking of fixed costs, the information from this analysis has given me good data to build my pro forma financials – when that time comes.
Now, at some point in the future, selling my product internationally could be an option. However, in this tiny niche, it is unlikely that I’ll ever need that much capacity for this one product.
Market size for a business plan
What were there factors I didn’t consider (but should have) when estimating my potential market size?
Businesses use operating leverage to keep costs fixed when they expect extraordinary sales volume. Keeping costs fixed means that businesses can carry more of that revenue to net profit.
The degree of operating leverage is a formula used to calculate how much operating leverage a business is employing. This formula tells you what will happen to operating profit when revenue increases or decreases.
The degree of operating leverage can be calculated two ways.
The first calculation looks at past costs:
Degree operating leverage = % change in Operating profit (EBIT) ÷ % change in Sales
If you don’t know your cost mix (variable vs fixed) then you don’t know how it’s affecting your small business. You don’t know if it would be advantageous to change the mix. And, if you did, what would happen. You don’t have a complete picture of your business and, therefore, aren’t making fully informed decisions.
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Degree of operating leverage and fixed costs
Operating leverage is the use of Fixed costs in order to amplify changes in Operating profit due to a change in sales.
Fixed costs might be considered risky because they do not change no matter how much you produce. But, they also don’t rise if you produce (and sell) more. The risk and reward go hand-in-hand.
The degree of operating leverage is a ratio that tells you how much your Operating profit will change due to a change in Sales.
For instance, if your degree of operating leverage is 5.0, then a 10% increase in Sales will translate into a 50% (5.0 × 10%) increase in Operating profit – all other things being equal.
Conversely, a 10% decrease in Sales will translate into a 50% decrease in Operating profit. The pendulum swings both ways.
Which formula should you use to calculate degree of operating leverage?
You can determine your small business’s degree of operating leverage through a couple of easy calculations. Or, you can just plug your numbers into the free workbook!
Some suggest calculating the degree of operating leverage as follows:
% change in Operating profit (EBIT) ÷ % change in Sales (Source)
For instance, comparing this year to last year, let’s say your Sales increased 10% and your Operating profit increased by 29%.
29% ÷ 10% = 2.9. That was your degree of operating leveragelast year. This formula doesn’t tell you what it is now.
In order to calculate your degree of operating leverageright now, use the following formula:
Total contribution margin ÷ Operating profit (EBIT)
If you’re not familiar, Total contribution margin = Sales – Total variable costs. Not just manufacturing variable costs (Variable COGS), but SG&A variable costs too.
Degree of operating leverage and profit
Your degree of operating leverage can give you insight into the risks you run from your cost structure (mix of fixed and variable). It tells you how susceptible your Operating profit is to changes in demand.
It will also allow you to know how much you need in Sales to breakeven. The higher your Fixed costs, the higher that breakeven point will be.
Beyond that, it tells you if your Fixed costs are in line with your ability to generate Sales. If that ability is high, then your company can benefit from the leverage provided by Fixed costs and can earn excess returns.
Conversely, if those Fixed costs are locked into assets that won’t contribute meaningfully to Sales, then they are going to be a drag on Operating profit. You’re always going to be fighting against them.
Financial and operating leverage are similar in that they employ the use of fixed costs in order to (hopefully) amplify the effects of sales on net profit and operating profit respectively.
Here are a few of my thoughts on the subject:
Since financial leverage is owed for years to come, it is, obviously, long-term. Therefore, it should be used on long-term projects. Projects that will bring in extra revenue for years to come. Hopefully, even, beyond the point when the interest is paid off. Don’t use financial leverage for something that will provide a one-time spike in sales.
Operational leverage, on the other hand, is tied to assets that can be disposed of. They’re not very liquid assets, certainly. But they are typically a burden that can be relieved of easier than contractually owed interest. Real estate can be sold, salaried employees can be laid off. And so on…
Ironically, financial leverage is frowned upon and looked at as riskier than operating leverage. However, both essentially serve the same function. They’re components of the income statement entered at different places.
Fixed expenses can be a powerful lever or concrete boots that drag your company down. It’s all about how those fixed expenses are put to work.
How to understand and act on your degree of operating leverage
Once you know what your Degree of operating leverage is, then you will know what changes in Sales will mean for your Operating profit. If you don’t anticipate that Sales can be increased, then you’re going to have to explore means to reduce Fixed costs.
On the other hand, if you anticipate the Sales will improve next year, then you have to ask yourself if you’re willing to add more Fixed costs (that will further increase Sales). If you’re confident you can do so, you might have a really great year.
A change in sales or variable costs and the effect on a company’s financials
As can be seen on the Effects of changes worksheet – a 10% increase in Sales, Variable COGS, and Variable SG&A would translate into a 29% increase in Operating profit from the Base case. This is to be expected since the Degree of operating leverage for the Base case was 2.90 (10% × 2.90).
Keep in mind that Variable costs would increase at the same percentage as Sales – as is their nature.
The flip side is also true. A 10% decrease in Sales and Variable costs means a 29% drop in Operating profit (-10% × 2.90).
Note that the Breakeven Sales amount doesn’t change in either scenario. This is because Fixed costs didn’t change.
A change in fixed costs and the effect on a company’s financials
“Why would fixed costs change?” you might ask. “They’re fixed,” you say.
Well, in theory, they don’t. But in practice, they might.
First, not many costs are 100% fixed or variable. It’s a sliding scale. Over a long enough timeline, all costs are variable they say.
Also, Fixed costs are often tied to fixed assets. Fixed assets are acquired and disposed of over the years. Salaries, which can comprise a lot of Fixed costs too, fluctuate with the hiring and loss of employees.
So, as you can see, it’s not much of a stretch for Fixed costs to change.
When they do, we can see that a 10% increase in Fixed costs translates into a 19% decrease in Operating profit. Not at all what we would expect from our Confirmation equation. 0% × 2.90 = 0%! Operating profit shouldn’t change!
But in this hypothetical example, it did. And, in real life, it could.
Of course, the opposite was true too. A 10% decrease in Fixed costs meant a 19% increase in Operating profit.
Notice, too, that a change in Fixed costs meant a change in the opposite direction for the Breakeven Sales amount. Not surprisingly.
What will the degree of operating leverage tell you about your company?
Don’t forget, you can get insight into the degree of operating leverage for your own business by accessing the accompanying spreadsheet for this post. Just enter your information in the white cells on the Your degree of operating leverage worksheet.
Fill out the form at the top of this post ↑ for quick, easy, free access.
What are your thoughts on the use of operating leverage vs financial leverage?
What is your degree of operating leverage and would you like to increase or decrease fixed costs?
Financial leverage is simply the act of borrowing money to invest. This is done with the hope of earning a return on that money. A return that is greater than the cost. Often, the potential for gain is disproportionately bigger than the cost. But, the cost is fixed and will be the same regardless of the return earned. Small businesses must learn how to effectively manage their degree of financial leverage. Otherwise, they could find themselves buried under the weight of repayment.
Let’s talk about some of the advantages and disadvantages of financial leverage. Also, how the degree of financial leverage ratio can provide insight into net income.
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Financial leverage advantages
Financial leverage is a strategy that can be employed to boost gains. The cost of borrowed money (typically) doesn’t change. So, if that money can be used in a way that earns returns beyond the cost of borrowing – a small business can end up way better off than it would have otherwise.
I always say that every investment comes down to three things – cash in, cash out, and time. If the cost of leverage (cash out) is low enough and the terms are favorable (time), then the cash in has the best opportunity to be big enough to make financial leverage worthwhile.
High financial leverage helps small businesses avoid dilution of earnings from the issuance of equity. It also gives them the ability to put more money to work than they would have otherwise. Both of these advantages can translate into excess returns.
Additionally, interest is tax-deductible. This lessens the tax burden that a company would realize if the same funds were raised through equity. Keep in mind that interest is a fixed cost. A fixed cost that can negatively affect a small business if operating profits aren’t high enough.
Financial leverage is a better fit for some businesses than others
On my sister site, I’ve written often about the benefits of certain business models. For businesses with the right business model, more financial leverage could be very beneficial. This is if it brings in more long-term customers. These business models are conducive to earning a good ROI on borrowed money.
Handling debt responsibly = the ability to borrow more in the future
If a small business effectively employs financial leverage, their creditworthiness improves. With improved creditworthiness, they will (likely) be able to borrow more in the future. If they continue to execute effectively, they can earn compounded returns.
The cost of borrowing (rate) could drop with a successful history of repayment. This could decrease the cost of future financial leverage. Lower cost should mean lower risk. Lower risk increases the likelihood of employing it in a successful manner.
Financial leverage disadvantages
Just as it has the potential to boost gains, financial leverage can also boost losses. Every dollar borrowed represents a little more risk. Again, that’s why the return from the borrowed monies means so much.
But, the lender doesn’t care if your small business makes 10x the cost of borrowing. Or, if it “only” makes 100% of the cost of borrowing. It expects its money back, plus interest, either way.
Borrowing money will increase your cash flow out. If the cash flow in isn’t enough to offset that, then, sooner or later, insolvency will ensue.
It all depends on the context
A lot of the negative stigma surrounding borrowing stems from the personal sector. In the personal sector, when people borrow, they often do so to buy consumer goods. Things that don’t earn any sort of return. These items actually depreciate in value. For example, cars and technology.
Nobody flinches when somebody borrows an ungodly sum of money to buy a house. This is because a house (for better or worse) is expected to increase in value.
Just as certain business models are conducive to financial leverage, others are not. Consider business models that sell time for money or one-time purchase items. These businesses will have to be confident in their financial modeling to ensure that they can earn an adequate ROI on financial leverage.
Finally, the perception of leverage depends on timing. During boom times, the companies borrowing look like geniuses. Conversely, if the economy turns against a business that has irresponsibly borrowed, then they could look foolish.
Financial leverage + operating leverage?
There are two general types of leverage that a small business can use. Operational leverage (which I plan to write about next) and financial leverage. The degree of operating leverage measures the effect of fixed costs (not interest) on operating income.
Beware compounding leverage by adding operating (fixed costs) to financial, or vice versa. This could sneak up on a small business. It could create a situation where management is caught unprepared. The result is potentially catastrophic. It’s important that scenarios like this be modeled out and planned for.
Most people understand the risks associated with borrowing money (financial leverage). The risks of operating leverage are a little more camouflaged.
Make sure you plan around your company’s (potential) total leverage situation. Annual strategic planning with an operating budget allows you to do just that.
Regulatory authorities might paint an overly rosy picture
When interest rates are kept low, the hurdle rate (minimum ROI to justify investment) is also lower. This incentivizes small businesses to take on projects that they might not otherwise. Less is demanded of investments. The pursuit of extraordinary returns might stop short in favor of quick-and-easy (but “good enough”) returns.
Also, by making interest tax-deductible, the effective cost of leverage is lowered even further. This further incentivizes small businesses to use financial leverage. Doing so could amplify any of the previously mentioned disadvantages.
Financial leverage example
The Degree of Financial Leverage shows the amplification that borrowing money can provide to profits and losses. So, for instance, in the example operating budget, the Degree of Financial Leverage is 1.4. This means, at this level of borrowing, that for every 10% change in Operating Profit, Net profit would increase by 14% (10% × 1.4).
That sounds great, but the opposite is also true. If Operating Profit declined by 10%, then this level of borrowing would cause Net profit to decrease by 14%. That’s the nature of leverage. It amplifies gains and losses.
I created a spreadsheet to model the changes in profit due to changes in other line items. It helps to better understand how the income statement is affected by financial leverage,
I started with a Base case income statement for a small business that has $1 million in sales. This example business also has a 20% operating margin with $500K in debt at a 5% Interest rate. Its Net profit is approximately $138K.
This company’s Degree of financial leverage is 1.14 ($200,000 ÷ [$200,000 – $25,000]).
Only one variable was changed at a time. Here’s what I found:
The effects of an increase or decrease in sales
A 10% increase in Sales translates into a 50% increase in Operating profit – all other things being equal. As expected, this 50% increase in Operating profit translates into a 57.1% increase in Net profit. This is because the Degree of financial leverage is 1.14 (50.0% × 1.14 = 57.1%).
The same thing happens, in the opposite direction. When Sales drop by 10%, Operating profit decreases by 50%. Net profit drops by 57.1%.
The effects of an increase or decrease in COGS and SG&A expenses
Since COGS is less than Sales, a 10% change doesn’t have as big of an effect on Operating profit. The result is a drop in Operating profit of 35%. As expected, the resulting change in Net profit is -40% (-35.0% × 1.14 = -40.0%).
SG&A expenses, being even lower, have less of an impact on Operating profit. A 10% increase only lowers Operating profit by 5% and Net profit by 5.7% (-5.0% × 1.14 = -5.7%).
Of course, things work the same in the opposite direction. A -10% change in COGS increases Operating profit by 35% and Net profit by 40%. A -10% change in SG&A expenses increases Operating profit by 5% and Net profit by 5.7%.
The effects of an increase or decrease in Long-term Debt & Interest rates
As shown above, changes in the income statement that result in increases to Operating profit are amplified in Net profit by the Degree of financial leverage.
But, what about changes below Operating profit? As expected, a 10% change in either the amount of LT Debt or the Interest rate, results in a corresponding 10% change in Interest expense.
This hypothetical small business carries a sizable amount of LT Debt. Still, Interest expense is still a relatively immaterial expense. Thus, the effect of a change in LT Debt and Interest rates is only ±1.4% on Net profit.
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Going forward with a new Degree of financial leverage
Because of the nature of the Degree of financial leverage calculation (Operating profit ÷ [Operating profit – Interest expense]), when Operating profit increases, the Degree of financial leverage decreases – all other things being equal. The opposite is, of course, true too.
What does this mean?
It means that if your small business increases Operating profit this year, then your Degree of financial leverage is going to go down for next year. Which isn’t catastrophic. But, it means that a similar gain in Operating profit next year won’t translate into the same boost in Net profit.
To get that, your small business would have to borrow more funds.
On the same token, if your company has a decrease in Operating profit this year, then your Degree of financial leverage will increase for next year. This increase will amplify the effects of a gain in Operating profit next year. But, it doesn’t necessarily mean that you’ll end up ahead of where you would have been if you would have increased Operating profit in year 1.
Shortcomings of the Degree of financial leverage ratio
Again, the Degree of financial leverage ratio is calculated as follows:
Big companies typically borrow money through the issuance of bonds. This means that they only pay interest until the bond matures.
Small businesses, like yours, don’t issue bonds. The nature of borrowing can vary, but often, loans are repaid on an installment basis. E.g. payments consist of both principal and interest.
So, a ratio that only measures the effects of Interest expense doesn’t completely capture the impact of financial leverage. For small businesses anyways.
Two extreme examples
First, consider a small business that borrowed 10x their previous year’s revenue. If they did so at a very low interest rate, their Degree of financial leverage would also be relatively low. But, having borrowed a disproportionate amount of money, they would theoretically have the opportunity to boost Sales/Operating profit greatly.
Also, consider the other extreme. What if a company borrowed a very modest amount of money? But, was forced to pay an exorbitant interest rate? In this instance, the Degree of financial leverage would be relatively high. But, the company’s opportunity to use this leverage in a beneficial manner is limited.
Finally, in order for the Degree of financial leverage to accurately predict the change in Net profit, Taxes must remain at a constant percentage. E.g. they can’t be 21% of Operating profit – Interest expense (EBT) one year and 22% the next. The Forecasted Change in Net profit won’t equal what’s calculated in the Confirmation.
The amount of LT Debt and the Interest rate/expense must also remain constant for the “Operating profit × Degree of financial leverage = Change in Net profit” equation to work out.
So, obviously, the Degree of financial leverage has limitations. It is designed for big businesses – not necessarily small ones. It is based on amounts in the income statement, and not the cash flow statement. Thus, no consideration is taken for the effects of principal repayment.
If its limitations are kept in mind, and if reasonable changes are forecasted, then it can provide guidance on the potential benefits or detriments of financial leverage.
How financial leverage affects business decisions
Plug your small business’ information into the Your degree of financial leverage worksheet. It will help you better understand how your borrowing might help or hinder you in the coming year.
Financial leverage, in and of itself, is neither good nor bad. It’s all about how it’s employed. If it’s used to buy (rather than sell) consumable assets that provide little or no return – it’s wasted. If it’s allocated to resources that increase productivity (or earn extraordinary returns) – it’s a valuable tool for small businesses.
What are your thoughts on the use of financial leverage?
What are some of the advantages and disadvantages I neglected to include?
How about some ways that you’ve effectively employed financial leverage in your small business?
Periodic sales promotions give small businesses the best chance of boosting sales and profitability when they are carefully planned.
Care must be taken to not use periodic sales promotions as a crutch when sales fall short of expectations.
QuickBooks Online price rules give small businesses the opportunity to efficiently apply promotional pricing to products and services.
Small business owners, who are concerned about what effects sale promotions might have on revenue, can use this information to lower uncertainty
Periodic sales promotions
Weekly/monthly/holiday sales, aka periodic sales promotions, are something we’re all familiar with. The “one day only sale!” The “Memorial Day sale!” The “semi-annual sale!” Or, the most famous, the “Black Friday sale!” are all examples.
Before we get too far into it, let’s split hairs on the terminology a bit. A periodic sales promotion shouldn’t be confused with a discount or a markdown. A discount is a reduction in price for a particular group of customers. A sales promotion, typically, would apply to all customers.
A markdown is a “permanent” lowering of the price of goods in order to incentivize purchase so that they can be removed from inventory. This would be done for items that are slow-moving (or not moving at all).
Periodic sales promotions are a means of reaching periodic sales goals
Periodic sales promotions can help complement the efforts of salespeople and advertising. Whether your business markets to consumers or other businesses, a periodic sale can stimulate buying on the part of your customers.
Periodic sales promotions should compel your customers to purchase immediately. So, the nature of your promotion will have to be such that it bridges your customers’ culture with your sales goals. For example, are you trying to get customers to switch from a competitor? Or, are you trying to penetrate a whole new market?
Don’t launch a periodic sales promotion without a plan. Consider how the promotion will impact your business at different volumes. Decide what products/services should be included. Consider your best-case and worst-case scenarios so that you are mentally prepared for whatever your customers throw at you.
The upside of periodic sales promotions
Dead and slow inventory takes up valuable space. Worse yet, it ties up valuable cash. If you have inventory that is turning over slowly, you might consider how you can work it into a periodic sales promotion in order to make room for inventory that will actually sell. Doing so would be preferable to getting pennies on the dollar by discounting.
I wouldn’t offer a sale that revolved solely around dead and slow inventory, however. That might be a dud. Perhaps you might consider marking down dead and slow inventory extra – beyond the normal terms of the promotion. An example for a car repair business – a 10% off sale on brake replacement for President’s Day, with slow-moving tires offered at 40% off. Take advantage of the increased traffic to get the most that you can for the dead and slow inventory.
A periodic sales promotion might incentivize people who wouldn’t buy otherwise. If the promotion only runs for a few days, the sense of urgency could be increased. People who may only have a vague idea of what your business is about could be compelled to “check you out” while the sale is going on. Furthermore, the first-timers, if they are excited about what they found, might tell others.
Since a periodic sales promotion will hopefully bring in a lot of new faces, it’s an opportunity to collect some basic information. Even just an email address or a like on Facebook. Knowing more about your customers in general and those that were lured by the sales promotion specifically will help you to meet their needs better.
The downside of periodic sales promotions
Even the least savvy business person knows that if you sell something for less, you’ll make less profit on it. Periodic sales promotions will result in lower margins. The hope is – to make up for that with increased volume (quantities).
But, if you are able to pull off a successful periodic sales promotion, be careful not to begin to rely upon them. The siren song of a boost in sales/gross profit might prove irresistible if future sales don’t reach the levels you hoped. If periodic sales promotions are part of your strategic planning, then great. Run with it. Just don’t start using them as a crutch if things aren’t going as well as hoped.
When a customer purchases something at a reduced price, you might not be able to get a read on their future purchasing behavior. That is, beyond the fact that they’ll buy “x” amount of something at “y” price.
We’ve all heard the old adage “price, service, quality…pick two” when it comes to offering a value proposition to customers. If your business aims to excel in service and quality, but begins to succumb to the temptation to lower prices to boost sales, then you might see yourself transformed into a low-price provider – at the expense of service or quality.
It always comes down to…planning
Again, at the risk of being redundant, it all comes down to planning. Give your periodic sales promotions the thought and planning they deserve. Don’t just “knee-jerk.” Working it into a plan will give it the best chance of being successful.
Every industry is different. Every small business within an industry is different. There is no “one size fits all” solution to planning for periodic sales promotions. Nevertheless, since this website is SpreadsheetsForBusiness.com, after all, I took a stab at it.
Download the periodic sales promotion planning tool.
Complete the form below and click Submit. Upon email confirmation, the workbook will open in a new tab.
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This is a very high-level workbook since it isn’t specifically made for any particular business/industry. Hopefully, however, it can give you a starting point for thoughtfully planning your own periodic sales promotion. Helping to ensure that it fits in with your strategic plan and helps your business reach its goals.
Periodic discounts in QBO
How to apply this knowledge in your accounting software, though? Well, here’s how you might go about it in QuickBooks Online.
We’ll look at periodic sales three different ways through the eyes of a restaurant:
First, an across-the-board 10% discount for everything. We’ll call it an “anniversary sale.”
Second, a 20% off of Mexican food and drinks promotion for Cinco de Mayo.
Finally, a weekly 15% off promotion for select desserts.
If you haven’t, read my previous post on the particulars of QBO price rules (levels). What follows won’t necessarily go into as much detail.
I’ll be using the sample company within QuickBooks Online Accountant. By default, this sample company is a landscaping business. For the purposes of these examples, I’ll make some changes to make the examples better reflect a restaurant business. But, if you see some odd things related to landscaping pop up in the screenshots or the video – that’s why.
In the previous example, we created a “dummy” price rule that provided no discount. We did this so that the price rule would not be applied by default during a sales transaction. However, in this example, for our restaurant, we want it to be automatically applied so that we don’t forget to give it to our customers. So, in this case, we’ll forego the creation of a “no discount” price rule.
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Anniversary promotion
The across-the-board 10% discount is easy to set up. In the price rules screen, we’ll create a rule called Anniversary Sale. This rule will only be in effect over the weekend of April 27, 2019.
Since it is an across-the-board discount, All customers and All products and services will remain selected by default. A 10% decrease in price will be applied.
Simple.
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Cinco de Mayo promotion
Next, we’ll look at the Cinco de Mayo promotion. In this case, it’s only our restaurant’s Mexican fare that’s on sale. Also, the sale only runs over the weekend – May 3, 2019, through May 5, 2019.
In this price rule, we selected the products in our Mexican subcategory. We then chose to decrease the price by 20%.
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Weekly dessert promotion
Finally, we’ll tackle the restaurant’s weekly (Wednesday) discount on desserts, designed to get people in the seats during the slow mid-week time period.
This was approached in much the same manner as the Cinco de Mayo discount. Except, there is no Start date and no End date. This is an ongoing promotion. All products in the Desserts category were selected for inclusion and they were decreased in price by 15%.
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Periodic sales promotions
When it comes to pros & cons, advantages & disadvantages, upside & downside posts, I always overlook a few. What are some of the pros and cons I missed for weekly/monthly/holiday sales promotions?
What other considerations need to be taken into account before a small business launches a weekly/monthly/holiday sales promotion?
Gear (icon) > Accounts and Settings > Sales > Products and Services > Turn on price rules
To create price levels:
Sales (left menu) >Products and Services > More > Price rules
Price levels (levels) in QBO allow users to specify price changes for customers, products, or a combination of the two
Promotional pricing can help drive sales and profitability
What are QuickBooks Online price levels?
Price levels (rules) are used in QBO to quickly and easily give special pricing on particular items, and/or to particular clients. You can mix and match customers with products/services when setting up price levels. Also, you can broaden your selection to all products/services that fall within a particular category. For instance, maybe you want to only have a sale on installation and not physical products. Not every pricing rule has to be across the board.
Price levels can be set up to give a percentage discount, a fixed dollar amount discount, or… you can simply enter a custom price for a particular item.
Furthermore, if it makes sense in your pricing strategy, you can even increase prices. Plus, you can round to the nearest dollar, $.49, $.99, and many other amounts.
Finally, for each price rule, you can enter a Start date or End date to control when the rule is applied. Beyond that, QuickBooks Online gives you the ability to easily activate and inactivate a particular price rule after it’s created. Therefore, you can create price levels now, and put them into effect as needed.
Why use price levels in QuickBooks Online?
Promotional pricing is a valuable tool when used wisely. It can help small businesses drive sales and profitability. It might even be a coordinated part of your strategic plan.
Whether it is a periodic/seasonal sale, coupons, a referral program, a customer loyalty program, or a volume discount – there are plenty of reasons that you would want the ability to easily applying special pricing for specific customers and products/services.
First things first, in order to use price levels in QBO, you’ve got to turn them on. By default, they’re turned off. The option to create a price rule won’t be available if they aren’t turned on first.
By the way, in my walkthrough here, I’ll be using the QuickBooks Accountant sample company. The sample company is a landscaping business.
Go to the gear in the upper right corner and select Account and Settings.
Once in the Account and Settings menu select Sales. Under the Products and Services section, you’ll see Turn on price rules (beta). Click on that and the checkbox. Then click Save and Done in the bottom right-hand corner of the screen. Price levels are now turned on.
Creating a price rule
Now, that price levels are turned on, you can create one. Go to the Sales section on the left (main) menu and select Products and Services. Alternatively, you can go directly to Products and Services from the gear in the upper right-hand corner.
Once in the Products and Services screen, click on the More drop-down menu in the upper right-hand corner and select Price rules. If this is your first rule, you’ll see the little intro graphic and text. Click the Create a rule button.
Each price rule in QuickBooks Online will need a name. A rule name should be succinct, yet detailed enough for you to understand what changes it will make when it’s applied.
As mentioned, you can make effective dates (Start date and End date), if you’d like to limit the time window in which this price rule will be in effect.
Next, you’ll decide whether you want this rule to affect all customers or just specific customers. And, you’ll decide if you want it to affect all products and services, categories of products and services, or individual products and services.
After that, you’ll specify what degree you want the rule to adjust the price. You can choose to adjust the price by a percentage, a fixed amount, or you can enter a custom price. Beyond that, you can specify if you want the price adjusted up or down. Price levels aren’t just for markdowns!
Finally, you’re given the option of having your price rule rounded to a specified amount. $.05, $.50, $.88, and so on…
That’s it! Those are the only variables to enter when making a price rule. You’ll see in the table at the bottom after you click Apply, the original price (Sales price) and the Adjusted price. The Adjusted price reflects the effects of the price rule you just created. Review those changes to make sure there are no surprises. Then click Save and close at the bottom.
Using a price rule in a transaction
In order to use a price rule, you’ll have to apply it to an individual sales transaction. So, for example, if we click on Sales in the left menu. Then, click on All sales on the top menu. Finally, click on the New transaction drop-down and select Sales receipt.
In this example, I’m just using a Sales Receipt for illustrative purposes. Pricing levels can be used in Invoices, Estimates, Sales Receipts, Credit Memos, and Delayed Charges.
Populate all of the customer information at the top. Select the Product/Service at the bottom. Click the Rate drop-down box and you’ll find the price rule you just created available as an option. Select the rule and you should see the Subtotal on the Sales Receipt change accordingly.
“What is the management of cash flow?” Cash management means not only having enough cash on hand to stay solvent but also having enough cash to take advantage of opportunities as they arise.
Cash management can be done in a number of ways. First and foremost, by collecting cash from customers as fast as possible and paying suppliers/vendors as slow as possible.
Also, consider other tactics including using a revolving line of credit, incorporating subscription-based billing, and outsourcing.
Below, you’ll see some practical techniques that your small business can use to better manage cash flow.
Rather than just giving generic advice, I’ll try to give some industry-specific examples. Hopefully, this will better illustrate how these techniques can help and inspire you to do something similar in your small business.
Uncertainty doesn’t jive with cash flow. For every problem, there is a solution. Maybe not an ideal one but there is something that you can do.
Speed up cash coming in from customers
The quicker you can get cash from customers, the better. All the sales in the world don’t mean anything until that cash hits your checking account. Here are some ways to encourage customers to pay faster.
1) Alter your terms
Offering a discount to customers who pay quickly is nothing new. It’s the reason terms like “1/10, Net 30” exist in the first place.
If you’re not familiar, this means that your customer could take a 1% discount if they paid within 10 days. But, even if they elect not to, the invoice is still due in 30 days. Customers who take advantage of this discount will get you your cash up to 20 days quicker!
While a 1% (or 2%, or 3%) discount might not sound like much, it can actually add up to a lot. For instance, not taking advantage of the “1/10, Net 30” terms outlined above would cost your customer over 20% on an annualized basis! Be sure to remind them of that!
This is a particularly good option if your product or service is higher priced. Or, if it doesn’t make sense to get a cash down payment, can you ask your customer to spread the payments out over the course of delivery? These options are especially helpful if you need to expend a considerable amount of cash to get the ball rolling on the project.
Depending on your industry, this might be kind of a hard sell. But, if the amount of the cash down payment is relatively small, your customer may go for it. You’ll never know if you don’t ask. Plus, if it helps to build a better relationship between you and your customer, perhaps they’ll be more receptive.
Computer Repair LLC’s solution
Computer Repair LLC is finding that they’re not getting paid until up to 45 days after services are performed. This has caused cash flow issues in the past since their lease payment, and many other expenses, are due monthly.
In order to better manage cash flow, Computer Repair LLC first decided to start sending out invoices immediately after services are provided. In the past, they had been waiting up to 2 weeks before invoices were mailed. Since several of their customers only cut checks once or twice a month, there could be a considerable time between when services were performed and when payment was received.
They also started including the words “Due upon receipt” on their invoices. They knew full well that not all customers would pay immediately. But, it was an improvement over their old method of making the due date three weeks after the invoice date.
Also, Computer Repair LLC started offering a small discount for payment received within 10 days or less of the invoice date. This provided an incentive for their clients to pay quickly.
Finally, Computer Repair LLC began to routinely monitor the accounts receivable (AR) aging report built into their accounting software. By monitoring this daily, they were unable to keep an eye on clients that were falling behind. When this happened, they followed up immediately to discuss the situation and make arrangements when necessary.
Slow down cash going out to suppliers/vendors
For the same reason it’s good to get paid fast, it’s good to pay out cash slow. Cash that you pay out is no longer in your control – after all! You don’t want to screw anybody over, of course. But, you want to take any fair advantage you can get. Especially if you’re facing a cash crunch.
3) Cut cash expenses
An expense that is eliminated is one that you can delay forever.
Perhaps you can purchase raw materials for less from a different vendor? Or, can you hire part-time or contract employees before committing to a full-time position?
What about overhead and general and administrative expenses? Things like insurance? Can you negotiate better rates? Is there marketing that you can do that’s just as effective, but cost less? How about leases? Can you re-negotiate them, particularly if times are tough?
Finally, and this is a tough one – can you lower your own salary? Would this work if you could lower your own personal expenses?
4) Alter your supplier terms
Just as you can make changes to your customers’ terms, your vendors can make changes to your terms. That is – if they value your business.
Yes, the same principle applies as far as it being beneficial for you to take advantage of discounts. But if cash flow is truly a problem, then it might make sense for you to forgo the discount in favor of sound cash flow management.
Can you get a few more days without sacrificing any sort of discount? That would be tremendously helpful. Every day counts.
Perhaps you’ve tried this with vendors before and have been told “no.” Ask again! The more you ask the more your vendor will understand how important it is to you. Hopefully, once they understand that, they’ll begin to consider it in the name of good customer service.
John Doe’s Restaurant’s solution
Given the nature of his business, John Doe doesn’t have any real problem with cash collection. He does, however, have to deal with a decent number of suppliers. Depending on how good of a day or week he’s had, sometimes the amount he pays his suppliers can cause cash flow crunches.
In order to remedy the situation, John Doe set aside some time to really look at each of his suppliers (and their terms) closely.
In the past, as was his personal habit, John Doe paid his suppliers as soon as he received the invoice. He wanted to be a good customer. He figured that since he was so small, it would keep him in good favor with his suppliers. Also, he knew that if you paid right away, you could take advantage of early payment discounts.
However, because he was interested in improving his cash flow, he decided to do things a little differently. He decided to handle each vendor individually rather than all of them in the same manner.
John Doe discovered that while discounts are always nice, some of them weren’t beneficial enough to offset the advantage of holding on to that cash longer. In instances where that was the case, instead of paying immediately, he made arrangements to make payment as late as possible. For some of his suppliers, this was 45 to 60 days after the statement date.
He also found that some of his suppliers had, what he considered, unnecessarily strict terms. In these cases, he contacted them individually and attempted to renegotiate terms. Not all of the suppliers cooperated. But, some offered bigger discounts for quick payment. Others pushed their terms out further into the future.
Manage cash with financing
5) Get purchase order (PO) financing
If you can’t talk your customer into making a down payment, you may have to finance purchase orders in order to take their business.
Purchase order financing is basically a short term loan for the purpose of paying for products/services so that your small business can complete the sale.
This is typically a somewhat costly option. But if getting this sale is the difference between staying in business and shutting down, then it’s something to consider.
6) Get a merchant cash advance
A merchant cash advance is where your small business gets cash upfront and then you repay that loan with a small percentage of your future sales.
Rather than paying back monthly installments, as with a traditional loan, you’ll likely pay the money back with micropayments over the course of days, weeks, or months. Obviously, as with any type of financing, there will be a cost to do so.
This cash management technique is frequently used by retailers and restaurants.
This technique can be used in conjunction with raising prices because you’re going to need that extra bit of margin in order to pay back the merchant cash advance. Make sure you have a smart plan to invest that cash advance money. It’s going to be costly, so make sure whatever using the cash for has a good ROI.
7) Factoring accounts receivable (AR)
This is another topic touched on in the Understanding Current Assets & Liabilities With Examples post/workbook. Factoring is also known as selling invoices. This is a technique where someone buys your accounts receivable off of you and pays a discount for them. So, you’re obviously not going to get as much for your sales. But, it will push the cash in your pocket right now.
Again, another situation where having high margins pays off.
8) Open a revolving line of credit (LOC)
You’re probably familiar with a revolving line of credit. 2nd mortgages are often lines of credit. As are credit cards.
So, it’s the same principle, just for your business. Borrow what you need, when you need it. As you pay the bank/credit union/financial institution back, you can borrow more.
The risk with any sort of borrowing is two-fold. First, there’s the matter of interest. The cost of money. The higher this is, the more expensive the payments will likely be.
The second risk is the fixed nature of the repayment. If sales go up, those payments are easier to make. If sales go down, they don’t change. They’re still the same fixed amount. This is why I harp on spending for good ROI on this site so often.
Learn more about how financial leverage can hurt or help you by reading this post.
Car Repair, Inc’s solution
Car Repair, Inc. is a one-location auto repair shop with aspirations to expand in the future.
Like John Doe’s Restaurant, Car Repair, Inc doesn’t have any issues collecting from customers. But, the owner has noticed that he often has to hold inventory that’s really expensive for a really long time.
Obviously, some car parts are very pricey. And, since every make/model of car has its own unique parts, it’s can be costly to manage this type of inventory.
He’d also like to be able to advertise more to grow his business. If he were able to do so, he’d like to open up a new location, expand a current location, or purchase a competitor.
While he has enough cash flow to handle typical day-to-day operations, he doesn’t necessarily have enough extra to grow.
At first, he considered getting a term loan to address these issues. But, after investigating further, he found that a line of credit for his auto repair business would make more sense. A line of credit provides him with more flexibility. He only has to borrow what he needs at any given time, rather than having to apply for a new loan every time he wants to borrow more.
Plus, if he should ever find himself in a cash flow crunch because business is a little slower than usual; he has easy access to enough cash to get him by until business picks back up. The flexibility and versatility of a line of credit provide security for his business.
Big business decisions to help with cash management
Beyond the obvious cash management techniques, there are operational decisions you can make to put your small business in a better position going forward.
9) Sell idle fixed assets for cash
This is, of course only an option for assets that are sitting around taking up space. You don’t want to sell assets that are bringing in income. However, if you don’t think that they can be put to good use in the near future, consider selling them. Or, at the very least, leasing them out.
There are pros and cons to this technique. First of all, consider what it would take to buy the asset back if needed. Maybe you’ll be surprised to find it wouldn’t cost much more than what you can sell it for.
Just make sure that you don’t place your small business under further hardship for a quick influx of cash.
10) Turn down work?
This one is also a little counterintuitive. As a small business owner, you know that sales are everything. So you’re probably not in the habit of turning down business. However, depending on your line of work, and the nature of the business, maybe it makes sense to pass on some business. Particularly business that would require an enormous cash payment upfront or financing of purchase orders.
Maybe it doesn’t make sense to turn down the business completely. Perhaps it can just be postponed? If your cash flow forecast says that it would be better to do the work in a couple of weeks/months ask your client if they would be okay with that.
11) Increase prices/margins
Though this won’t necessarily bring in cash faster, there could be more of it when it finally does come in. At that time, more cash could be the difference between paying all of your expenses that are due, and only some of them.
You don’t necessarily have to increase prices across the board. You don’t necessarily have to increase them a lot.
Do you have a product/service that’s in particularly high demand? If so, can you add a couple of percentage points in margin?
Consider what’s unique about your business here. Think about the value you’re adding. When it comes time to pass along a price increase make sure you emphasize those points to your customers.
12) Switching to a subscription-based business model
As a small business owner, you know that it takes cash, time, and effort to make a sale. Probably a little less for a repeat sale. Even less for a loyal customer.
What if you only had to expend that cash, time, and effort once, and then could count on a customer’s cash to keep flowing in month after month? Doesn’t that sound better than starting from scratch after every sale?
There’s a reason that businesses are always pushing you to pay a monthly fee for unlimited products/services (or something similar). It’s because that sort of business model keeps consistent, predictable cash coming in.
Some industries lend themselves better to a subscription-based model, certainly. So, if this is something you’re interested in implementing in your small business, you might have to get creative. Look at your competitors or others in a similar industry. Are any of them offering subscription-based services? Ask yourself how you can tweak their model to make it your own.
Bookkeeper LLC’s solution
Now let’s consider Bookkeeper LLC. Bookkeeper LLC performs routine bookkeeping and some advisory services for other local small businesses.
In its early years, Bookkeeper LLC charged clients by the hour. It seemed, at the time, like a fair way to bill for the services provided. They only paid for what they needed. Most clients were fine with the arrangement.
Bookkeeper LLC noticed, however, that there could be a month or more between when services were performed and payment was received. In addition, as the owner of Bookkeeper LLC has gotten more experience, and more efficient, she’s making less money because she’s billing fewer hours. So, as time’s gone on, sales growth has been lackluster even though hourly rates have been raised.
Another problem that the owner of Bookkeeper LLC foresaw, was this – even if she was able to bring in more clients (to make up for the time she was no longer billing), ultimately there would be a point where she ran out of time. There are only so many hours in the day. As it stood, her business wasn’t scalable.
Also, like any other business that attempts to collect payment after the work is already done, Bookkeeper LLC ran into situations where collections from clients could be downright excruciating.
After struggling with these issues for some time, the owner of Bookkeeper LLC decided to pull the trigger and move to a subscription-based billing arrangement.
Some clients embraced the change.
Other clients pushed back. But, the owner of Bookkeeper LLC explained to them how the change was beneficial. What they paid for her bookkeeping services would be more predictable and easier to budget going forward. In turn, she is indirectly helping her clients to better manage their cash flow.
After switching to a subscription-based billing model, Bookkeeper LLC now, effectively, gets its money in advance rather than after services are provided. Billing and receipts are automatic. Any cash flow problems that Bookkeeper LLC had in the past are now alleviated.
Because her revenue is so predictable, she’s able to manage expenses accordingly. Collections and other accounts receivable headaches are a thing of the past. Now she can focus on working on her business rather than in it.
13) Outsourcing – spend cash to save time
Maybe you’re concerned about your small business’ cash flow situation. But, you’re being pulled in so many different directions that you can’t make time to think on the matter. If so, this may be one of those instances where you have to spend cash to save cash.
Isolate what it is that is eating up most of your attention. Is there someone better qualified to handle this (e.g. bookkeeping or marketing)? Or, is it something where you can easily document your process and hire someone from Upwork or Fiverr?
Getting these sorts of tasks off your back can not only help you focus on the health of your business, it can improve your mental health too.
Jane Doe’s Web Design’s solution
The last business we’ll consider is Jane Doe’s Web Design. Jane’s company creates websites for local small businesses.
Since Jane’s business is a “one-woman show,” so to speak, she’s responsible for every task in the business. This doesn’t leave nearly enough time to do the things she is good at it (and actually gets paid for) – creating websites. Therefore, she doesn’t bring in as much cash as she otherwise could.
When Jane finally decided that she wanted to take control of her cash flow problems, the first thing she did was something that might seem counterintuitive. She spent cash to have other people take care of those things which she wasn’t good (or efficient) at.
One of those things was marketing – specifically lead generation. Since she wouldn’t have to pay until new customers were brought in, the return on the investment was very good.
Also, since Jane isn’t a bookkeeper, she decided to pay for someone else to handle that too. The amount of time that this freed up allowed her to focus on her client’s needs and get websites done sooner. That led to getting paid sooner. It also allowed her to explore new technologies that could provide more value to her clients.
Finally, Jane decided to utilize the services of a virtual assistant. Just as with bookkeeping, doing so freed up an enormous amount of time which translated into more satisfied clients and a more satisfied by owner.
What is the management of cash flow?
Sales are the most important thing for any business. Cash flow is a close second, however. Use the template provided in the previous post to anticipate cash flow issues. Use the tactics mentioned in this post to better position your business for cash flow health.
What other tactics has your small business used to improve cash flow?
What industry-specific challenges does your small business face in terms of cash flow?
Download the free template by filling out the form below
Categorize and list detailed expenses
Forecast revenue needed to cover expenses
Review the pro forma income statement and ratios
Plan for the best and worst-case scenarios
Download the church operating budget template
Complete the form below and click Submit. Upon email confirmation, the workbook will open in a new tab.
Operating budget example for small churches, big churches, and every church in between
This is the second post on church budgeting and the fifth overall on church strategic planning.
Previously, the capital budget for the church was covered in depth. This post will focus on the operating budget. The capital budget, if you’ll remember, is the budget that the church completes for every potential project it plans to take on in the coming year. The operating budget consists of a forecast of revenue and expenses for the coming year. The culmination of the operating budget is a pro forma (or expected) income statement.
After completion of the capital budget and the operating budget, the church will be ready to tackle the financial budget. The financial budget will be covered in the next post.
What is an operating budget for a church?
An operating budget allows a church to be proactive regarding its revenues and expenses for the coming year. It allows the church to plan accordingly and to be ready for any scenario that might come its way. Doing so will allow the church to better meet its mission.
Information gleaned from the mission statement, SWOT analysis, strategy formulation, and capital budgeting will all play a part in preparing the Operating Budget for the coming year.
Creating an operating budget can be as simplistic as writing down a guess about how much revenue the church will make in the coming year and the number of expenses it will incur. This is better than nothing.
Dedicating some thought to each revenue source and each type of expense, plus estimating how they might rise or fall over the course of the year helps to paint a more accurate picture of the church’s financial position. Additionally, using the Spreadsheets for Business church operating budget template will give you the ability to not only estimate what the most likely scenario to play out next year will be, but will also help you to plan around a best case scenario and a worst case scenario.
Download the template by filling out the form at the top of the post.
How much time and effort should be dedicated to a church operating budget?
Any amount of planning is better than no planning. There is, however, such a thing as over-planning – AKA, paralysis by analysis. The sweet spot is somewhere in the middle – enough planning for you to feel confident that your church is in a position to thrive in the coming year.
The amount of thought you dedicate to each item in this church operating budget example is up to you. I urge you not to overthink it. However, after going through the following steps, I think you’ll find yourself rather confident about your church’s future going into the new year. With some of the worry off your plate, you can focus on other areas that will help your church achieve its mission.
How might an operating budget for a church differ from a for-profit business?
Fortunately, creating an operating budget for a church is much less complicated than for, say, a manufacturing company.
When creating an operating budget for a manufacturing company, you start with revenue and work your way through budgets for materials, labor, overhead, production, and a lot of other inputs.
When creating an operating budget for a church (which is essentially a service) some of that complication can be avoided.
Should you start with budgeting for revenue or expenses?
Personally (and maybe this is due to my background in budgeting for manufacturing organizations), I still think it’s smart to start budgeting with revenue. That way, you know how much you expect to make in the coming year and can plan your expenses around that information.
However, there’s also a school of thought, particularly by Aubrey Malphurs and his organization, that claims you should plan your expenses first. Then, you know how much you need to bring in to cover those expenses. Aubrey is much more of an expert on church operations than I am, admittedly. I can see the rationale behind this school of thought.
You should start with whichever you’re more comfortable with – expenses or revenue. I imagine as you get deeper into the process of forecasting, that you’ll be bouncing back and forth between the two anyway. So, ultimately, what you start with won’t matter. Unlike a manufacturing company, the levels of your revenue and expenses won’t necessarily affect each other. All that matters is what you end up with.
Look, your budgets are never going to be exactly right. That’s fine. What’s not fine is going into the coming year with a church that is at risk because you haven’t dedicated adequate thought to what the coming year may bring.
An operating budget won’t guarantee that your church will be successful. That’s why you shouldn’t spend every waking second working on it. It’s just a matter of giving appropriate thought to the matters of revenue and expenses.
The Pareto Principle states that 80% of outputs come from 20% of inputs. If you buy into this – 80% (or so) of the benefits of creating an operating budget for your church will probably come from the first 20% of the time that you spend on it. What this means, of course, is that by merely dedicating a tiny bit of thought to these matters, your church will reap big benefits.
How to create an operating budget for your church
Operating budgets look complicated, but at their core, they’re fairly simple. All you’re going to be doing is estimating your expenses, estimating revenues, and then filling in a couple of other details. There are no wrong answers. As a steward for your church, you’re in a better position to answer these questions than anybody else on Earth.
Let’s get started!
Your church’s expenses
Obviously, your church has costs that it incurs to provide needed support to its membership. Again, I have to give credit to Aubrey Malphurs for the framework of how expenses are grouped together.
Expenses are grouped into four broad categories: evangelism/missions, personnel, ministries, and facilities.
Within each broad category, each Expense is broken down into more specific categories and beyond that, into greater Detail.
So, depending on how organized your accounting is, you should be able to (hopefully) begin by breaking your existing expenses down into these four broad categories. Once you’ve done that, then you can begin to group similar expenses by subcategories. Then eventually, of course, you want to budget for every detailed expense.
Classifying expenses as fixed or variable
Along with every Expense in a subcategory, you’re going to classify it as fixed or variable. This sounds like a pain in the rear, but it’s good to understand the nature of each cost.
Fixed expenses, as the name implies, don’t change with revenue. They’re going to be the same whether you have a very busy year or a year where you just sit around twiddling your thumbs. For example, salaries are fixed and insurance is fixed. Any other expense which will be the same month after month, over the course of the year, is fixed.
Variable expenses, on the other hand, change. They typically change based on the level of revenue. If revenue goes up, variable expenses also go up. If revenue goes down, variable expenses would probably go down. For example, expenses related to outreach and local mission work might depend, in large part, on the amount of revenue received. So they can probably safely be classified as variable.
There’s no right or wrong answer when it comes to classifying your costs as Fixed/Variable. Some will be obvious, while others…not so much. Again, don’t dwell too much on this classification. Give it a little thought and select what you think is appropriate. The only real effect is on some of the ratios that are calculated once the budget is completed. You can always go back and change your classification.
Use the past to plan for the future
You can refer back to historical amounts, of course, to help with the forecasting of future expenses. In fact, that’s probably a very smart thing to do. Looking back at historical amounts paid will also help you to determine if an expense is fixed or variable.
If this is your first time completing an operating budget such as this, then I would suggest that you still break each expense down into broad categories (evangelism/missions, personnel, etc.). But, maybe don’t break them down into too many subcategories (district & synod support, convention assessment, etc.). And, definitely don’t overdo it breaking expenses down into detailed categories (detail expense 1, detail expense 2, etc.). You can always go into more detail next year.
On each of the broad category budget worksheets, you’re going to start at the top and list each Expense subcategory. Also, pick either Fixed or Variable from the drop-down menu.
In the bottom section – this is where you’ll break the subcategories down into detailed expenses. All of the detailed expenses will sum for the month and that amount will be carried back to the top
Let’s look a little deeper into each broad category.
Evangelism/Missions Budget
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The Evangelism/Missions Budget is where you’ll classify expenses related to efforts directed externally from the church to reach individuals who likely aren’t members.
Next, go to the detail section and itemize the subcategory expenses. Additionally, start forecasting month by month for the whole year. Each subcategory will automatically add all the detailed expenses.
You’ll see that a Total for each month and for whole the year is calculated. These amounts will carry over into other worksheets.
Personnel Budget
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The Personnel Budget is pretty self-explanatory. This is the money planned to be spent on the individuals who help run your church.
Expenses such as salaries, fringes, utilities for housing, and guest pastors/speakers would be entered here.
Ministries Budget
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The Ministries Budget is where you will enter expenses directed toward the individuals that are already a member of your church.
You know the drill by now – enter the appropriate subcategories and then the names and amounts for the detailed expenses.
Facilities Budget
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The last category of expenses is also pretty self-explanatory. A Facilities Budget includes those expenses that are required for your church, as a whole, to function.
How do you differentiate if expenses are for personnel or facilities? Easy, if the expense is, more or less, for one employees’ benefit then it’s probably a personnel expense. Conversely, if an expense is for everybody’s benefit then it’s probably a facilities expense.
As mentioned before, this is all somewhat subjective. There are no right or wrong answers, per se. Trust your gut, trust your experience, and classify expenses in whatever way makes the most sense to you.
If you’ve been following along closely, you’ll notice a special expense listed under the maint and repairs subcategory.
In the capital budget, we examined the feasibility of adding on to the church’s parking lot. Ultimately, based on the expected cash inflows and cash outflows, it was determined that making an addition to the parking lot was in the church’s best interest. So, in our hypothetical church, that project will be undertaken and will need to be included in the coming years’ operating budget. You’ll see detailed expenses related to the parking lot under the maint and repairs subcategory and the depreciation subcategory.
Don’t solely rely on what you spent in the past to create a feasible budget going forward into the future. Make a note of anything that might change and of any new expenses that might be incurred in the coming year due to projects approved in the capital budgeting phase.
How much revenue will you need to cover those expenses?
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Estimating expenses is a bit depressing. But now we get to tackle the fun part, and that is estimating revenue.
Revenue also has subcategories, but they are not broken down into detail.
By now, you know the routine. In the Revenue Budget, enter the start date for your budget in the cell D9.
You’ll see that the Revenue Source column is already populated but you’re welcome to change the descriptions as you see fit.
For each month and each Revenue Source, enter the forecasted amount of revenue. A Total for the months and for each Revenue Source will automatically be calculated.
Maybe you’re baffled as to how to forecast revenue. Offerings and donations are probably at least somewhat consistent. But, other sources of revenue like facilities use charges and trusts, investments and bequests are difficult, if not nearly impossible, to accurately predict.
First of all, I’ll say the same thing I did when it came to forecasting expenses, and that’s to just come to terms with being wrong in the first place. The value in this, again, is to dedicate a little bit of thought to it.
Spreadsheets for Business has a free tool that can help you forecast revenue (or expenses, or anything really…) accurately and it can also help you gain insights into what drives revenue.
Once the information is entered into the Revenue Budget, then you are very nearly done with the operating budget.
The church’s Pro Forma (expected) income statement
After completing all of the expense budgets and the Revenue Budget, you should see a nearly completed Pro Forma Income Statement. All that’s left to enter is information about interest.
If your church keeps funds in an account that pays a reasonable amount of interest, enter what you might expect to earn this year in the Interest Income field.
On the other side of the coin, if your church borrows money, then you will likely have Interest Expense over the course of the year. That amount in the Interest Expense field should be added as a negative amount.
Now you should have a pretty reasonable idea of what the coming year will look like from a revenue and expense standpoint. Notice that each of your expense categories has the amount as a percentage of Total revenue listed next to it. This gives you an idea of how your expenses are weighted.
For reference, Aubrey Malphurs recommends the following weightings:
Evangelism/Missions 10%
Personnel 40%
Ministries 25%
Facilities 25%
Obviously, your church doesn’t have to have this exact percentage for each expense category. But it simply gives you a benchmark to measure your church against.
All the calculations in the Pro Forma Income Statement are pretty straightforward. Operating Profit is Total Revenue –Total Expenses.Net Profit is what’s left after Interest Income and InterestExpense are accounted for.
Ratios and chart
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Now we’ll look at some very basic ratios to put the Operating Budget into perspective. These ratios were designed for, and are primarily used by, for-profit businesses. But even though a church operates differently than a for-profit business – especially a manufacturing company – they still might provide a little insight and perspective for the church leaders to use in decision making.
Profit margin
Profit Margin is pretty straightforward. It’s just Net Profit ÷ Total revenue. It shows you, in percentage terms, how much revenue you bring down to the bottom line.
Times interest earned
Times Interest Earned is a ratio that focuses on your ability to cover your interest payments.
Obviously, if an organization borrows money it needs to be able to meet the additional obligations placed upon them. So Times Interest Earned shows you, by taking Operating Profit ÷ Interest Expense, how many times over your church can cover its Interest Expense.
Degree of financial leverage
The Degree of Financial Leverage shows the amplification that borrowing money can provide to profits and losses. So, for instance, in the example operating budget, the Degree of Financial Leverage is 1.4. This means, at this level of borrowing, that for every 10% change in Operating Profit, Net profit would increase by 14% (10% × 1.4).
That sounds great, but the opposite is also true. If Operating Profit declined by 10%, then this level of borrowing would cause Net profit to decrease by 14%. That’s the nature of leverage. It amplifies gains and losses.
Most people can pretty easily grasp the nature of financial leverage.
If you borrow money and get to keep the gains from the borrowed money, then financial leverage is great. If you borrow money and your investment loses value, then you not only have the loss to deal with but you also still owe for the money you borrowed.
Degree of operating leverage
What’s not so easy to grasp is the benefits and detriments of other fixed costs, besides interest payments. The Degree of Operating Leverage quantifies the benefits and detriments of incurring fixed costs.
Why are fixed costs so important? Well for lack of a better answer – because they’re fixed. You are going to pay them anyway. So, if fixed costs really help you ramp up your operating profit, then that’s great. Because fixed costs aren’t going to increase on you.
The inverse is also true. Since fixed costs don’t change, you still have to pay them even if they are dragging operating profit down.
The Degree of Operating Leverage tells the same story as the Degree of Financial Leverage in the sense that it tells you how much greater Operating profit (not Net profit per se) would have been in the absence of fixed costs. This ratio really starts to get into detailed management accounting. That amount of detail is probably beyond the scope of this post, but since it’s included in the Executive Summary, I wanted to touch on it briefly.
In the example workbook, the Degree of Operating Leverage Is 10.2. This means then that a 10% increase in Total revenue, everything else being equal, would translate to a 102% increase in Operating Profit. Obviously, you know what that means if Total revenue went the other direction. It means that a 10.2% decrease would put Operating Profit in the red.
More about degrees of leverage
There is no good or bad Degree of Financial Leverage or Degree of Operating Leverage. It’s simply a reflection of the way your costs and borrowing affect your income statement. Leverage is great if Total revenue and Operating Profit are increasing. Leverage is bad if the outlook for the coming year is bad. So if your leverage is high and you’ve got concerns about your ability to bring in revenue for the coming year – then you’d better start looking to reduce fixed expenses and Interest Expenses.
Finally, at the bottom of the Executive Summary, you’ll see a handy chart that will illustrate the level of revenue and expenses (broken down by broad category) for every month in the upcoming year. This allows you to visualize how all these factors, which affect the financial health of your church, are expected to fluctuate throughout the year.
Plan for every scenario your church might face
Say that creating a simplistic operating budget is working at level 1 out of 10. Completing the Spreadsheets for Business operating budget template takes you up to 7 out of 10. This next section is what will push your church up to a 10 out of 10.
On the Likely-Best-Worst Scenario worksheet, you’ll see all the information pulled in from your Pro Forma Income Statement and the subsequent ratios under the Most Likely Amount column. But, what you will have the opportunity to do here, is to imagine multiple scenarios – some good, some bad. You’ll get to picture what your Pro Forma Income Statement will look like in the best-case scenario and the worst-case scenario.
Better or worse than expected revenue and expenses
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To use this valuable worksheet, all you need to do is start with a multiplier for the best case and worst case. Obviously, the best case for revenue is going to be a positive percentage, and for expenses, a negative percentage.
On the other hand, of course, the worst case for revenues is going to be a negative percentage, and for expenses, a positive percentage. Here, you are going to have the opportunity to play around with positive and negative future outcomes, and see what feels right in terms of multipliers for revenue and expenses.
But beyond simply entering a Best Case Multiplier and a Worst Case Multiplier for revenue and expenses, you can also refine the scenarios even further. You do this by entering specific amounts in the Best Case Override Amount and Worst Case Override Amount.
What are override amounts?
It means that you can tweak the dollar amounts for revenue and expenses even further. For instance, maybe you hope that your church might be blessed with an extraordinarily high amount of revenue from trusts, investments or bequests. You can thus enter a specific amount in the Best Case Override Amount for whatever would constitute the “best case” for your church.
On the flip side, say you know that, potentially, the worst case scenario for facilities expenses is that you need to replace the church HVAC system. So, you enter an adjusted amount in the Worst Case Override Amount for facilities that reflects this added expense.
You can also tweak the override amounts for Interest Income and Interest Expense.
At the very bottom, you’ll see the effect on the ratios from the Executive Summary based on what you entered for the Best Case and Worst Case Multipliers and Override Amounts.
There’s an old saying that goes, “hope for the best, but plan for the worst”. With this scenario planner, you’re able to do just that. You’re able to protect your church from contingencies while being prepared to act accordingly if the coming year is full of blessings.
Church operating budget
Maybe all of this seems overwhelming. That’s understandable if you’re not accustomed to planning with this level of detail. Again, I urge you (as the creator of this “overwhelming” budgeting template) to not overthink it.
What I do urge you to do however is to download the template at the top of the post – and to boldly use it.
Go over it once, quickly filling in the information you have handy, then walk away from it. After that, come back to it, look at it, reflect on what you’ve already entered and make any changes you feel are necessary. Then walk away from it again.
This is (for lack of a less cliched term) “a living document”. It is designed to take the relatively simplistic information of your forecasted revenue and expenses and to do the hard work of providing valuable output. That will allow you to be proactive for the coming year and give you confidence as a leader of the church. It can help your church not only stay financially solvent but also fulfill its mission and achieve its goals.
What other (sub) categories of revenue and expenses would you include?
What percentages and amounts would your church enter to prepare for worst and best-case scenarios?
