Let's say you planned to sell one hundred $10 products this month, but you sell two hundred instead. That's an extra thousand dollars in your pocket!
.... or is it?
With each additional product, service, or experience sold you make another promise that is going to cost you. In this case, if you spend $5 to produce each product, you pocket five hundred rather than one thousand dollars.
With each purchase, you'll directly spend time and money creating and fulfilling the sale, but you'll also indirectly spend money on customer support and other operations needs as your business grows. That's why dollar-based budgets don't usually work!
Instead of creating a dollar-based business budget, create a budget based on percentages of revenue per category. This way, your spending scales up and down based on actual performance rather than what you think you should spend.
I’m sorry to say it, but dollar-based budgets are laughably impractical in business, as long as you intend to remain flexible and lean into (or out of) profitable opportunities as they arise.
If you've created a business budget before, you’re familiar with the dollar-based budget process.
You get in a room with a whiteboard and a spreadsheet, map out every project you plan to tackle in the next quarter or year, and then do some rough math to estimate how much each project will cost and how much you will earn.
Once your satisfied that your budget is plausible, you leave the room and create hiring plans and marketing plans based off of your previous educated guess.
I’ll give you bonus points if you made the budget based on historical financial data or demographic research, but most entrepreneurs don’t do that.
Create a Percentage-Based Budget
Dollar-based budgets work much like a brand-new car. They immediately start to lose value as soon as you leave the room or drive off the lot. The real world leaves a mark, and the shiny new budget loses its new car smell right away.
That's why percentage-based budgets are a powerful alternative.
They provide boundaries that keep spending in check, but they also help you remain nimble by building in a framework for scaling spending up or down based on actual sales.
Think about it, what if you knew that 30% of your budget was operations?
Within those operations costs, you could divide the budget further into overhead and marketing, along with any other important categories, but the bigger picture of 30% of Net Income set aside for operations would immediately set clear boundaries on your spending.
If you generate $10,000 in Net Income, then you would set aside $3,000 for operations. If you generate $50,000 in Net Income, then you would set aside $15,000 for operations instead.
You don’t need to spend your full budget all at once, but you can watch that budget grow (or shrink) to match your actual income and then choose where to strategically invest your operations expense.
That’s the power of percentage-based budgets; they scale up and down as needed based on how your business is performing, rather than how much you think you should spend.