Saturday, December 10, 2011


Recently Time magazine had an article about teaching kids to estimate and how important it is. It's also important for business people to be able to estimate too. I was reviewing a company budget the other day and Accounting published a projection of profits by product line. The profits were calculated to the penny. "Really? Shall we hold you to this 'estimate' of profits, so that if we're a few pennies short, it means failure?"

Estimates are just estimates but being able to estimate is an excellent tool to have at your disposal. I learned this once when I was showing a spreadsheet to a boss. He thought the bottom line looked a little funny, maybe too good to be true. Sure enough, there was an error in how the formula was created.

So, quickly, can you estimate how much more business you need to generate to overcome $100,000 in additional expenses at 10% net profit? That's pretty easy, right? Suppose you're total costs are $3.5 million. Labor is about 30% of the total costs and benefits are 25% of that. What are the approximate total direct labor costs? How about if you know roughly 20% of your services need to have lower overhead rates by ____ % in order to improve overall profitability by 5%, and overhead is $43/hr. What percentage drop do you need and what will be the new target overhead rate?

For the last scenario, the overhead rate needs to drop by $10-$11 per hour. If a report shows something radically different, you know there's an error. What if you're looking for improvement on the other 80% of your product? The answer on the spreadsheet better be quite a bit less than $10/hr ($2-$3 range, get it?).

You can't always believe what you read. So take into account that errors happen on spreadsheets with formulas and data input. You can double-check your own work quickly and others.

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