Cost and Revenue Budgeting

In this article, we will explain how to budget costs and revenues for professional service companies. You can download an excel model of cost and revenue budgeting that you can easily modify to fit your needs.

Revenues budgeting

Preparing a budget at the level of service lines is crucial for a professional service company. If you want to be more detailed, you can do a budget for each individual client and then allocate budgeted client revenues per service line.

For example, you have Client A and you provide accounting and consulting services to them. You have agreed fixed monthly fee for accounting services in the amount of 1000 USD. So, the budgeted amount would be 1000 USD x 12 = 12000 USD.

Additionally, you have agreed upon consulting fees based on an hourly rate. As your estimated fee depends on the number of hours your team will be investing, you cannot predict exact revenues. Hence, you need to make an estimation based on historical hours worked for that client. In case you do not have historical data, you need to make an estimate about engagement, keeping in mind that it is always better to count on the worst-case scenario instead of optimistic projections.

Cost budgeting

1. Subcontracting fees

Subcontractors are the first level of expenses you will need to budget.  We recommend listing all potential subcontractors and predicting their costs in the next 12 months.

Assumptions to consider:

  • Current number of subcontractors
  • Historical costs of subcontractors
  • New subcontractors
  • General rules about the margin you expect in case you use subcontracts

2. Salaries and staff costs

Before you fill your budget, you should prepare a supporting calculation of gross salary for each employee and all related costs such as bonuses, education, travel, etc. Take into consideration that salaries can increase and that bonuses may depend on overall company results. When you have all figures calculated based on realistic assumptions you can fill a summary budget table like the one presented below.

Assumptions to consider:

  • Number of employees
  • Historical fluctuation (in the case of frequent fluctuation you need to assume additional recruitment costs)
  • Replacement (in the majority of cases new people cost more than replaced people)
  • Salary increase
  • Leaves
  • Bonuses
  • Travel (planned meetings for example)

salaries

3. Direct costs

A direct cost is a cost directly related to service and revenue generation.

Assumptions to consider:

  • Fixed fees (list all fixed monthly costs and calculate the budget)
  • Different marketing channels (marketing strategy)
  • Travel plans
  • New investments
  • Office space change

direct costs

4. General costs

General costs

5. Profit indicators budgeting

Based on the calculation above you can calculate budgeted EBITDA (Earnings before interest tax depreciation and amortization).

In the next stage, you can budget interest expenses and depreciation.

6. Interest expenses

For the most accurate estimation of interest expenses, you can use your loan amortization plan. In that plan, you can find the total sum of interest for the period you are preparing the budget for.

7. Depreciation

In order to make the best depreciation cost budget, you need a supporting excel file that contains all fixed assets’ purchase value and depreciation rates. You need to add planned capital expenditure for next year to that list and apply depreciation rates to all items. Depreciation is to be calculated by multiplying the purchase value of the asset and the depreciation rate for that asset.

Depreciation

8. Performance budgeting

After you budget for each category of revenues and expenses, you can also make a budget of your key performance indicators. We include the calculation of key performance indicators in the excel model for preparing the professional service company budget.

What is the best time for budget preparation?

The budget is most often prepared for one (next) year. In most cases, companies prepare their budgets in September or October of the current year for the next year. Some companies also prefer to make certain budget adjustments in December, based on new assumptions.

 

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