7 - Budgeting Backwards Starting With Profit, Not Revenue
A series about business efficiency, finding profit and how to get there
Introduction
Traditional budgeting in SMEs often goes like this - “We think we’ll make $X in revenue this year, so let’s allocate spending accordingly.”
It seems logical. Predict income, then plan expenses.
But in a flat economy, that logic can be dangerous, because revenue is uncertain, costs are rising and hope is not a strategy.
There’s a more grounded, proactive approach budgeting backwards. That means starting with your desired profit, then working backward to determine what you can afford to spend and how efficiently you need to operate.
This method flips your mindset from “what can we do if we earn more?” to “how do we make what we keep intentional?”
It’s not just budgeting - it’s business design.
Actions to Be Taken
To start budgeting backwards, walk through these simple but powerful steps
Set a Clear Profit Target
Ask yourself What level of profit would make this business financially healthy, rewarding, and sustainable?
Set a fixed dollar amount (not just a percentage). For example “We want to retain $150,000 in net profit this year.”
Subtract Fixed and Essential Costs
List all non-negotiable expenses rent, key staff, insurance, compliance, essential subscriptions. These are your baseline operational costs.
Determine What’s Left for Variable Costs
Whatever’s left between revenue and fixed costs is your “operating envelope.” Use this to
Allocate spending for marketing, tools, additional staff
Prioritise efficiency initiatives
Make conscious trade-offs
Work Backward to Set Revenue Targets
Now you can calculate what revenue you must generate to support that structure.
For example, if you want $150,000 in profit, and your total expenses (fixed + variable) are $600,000, you need $750,000 in revenue, not the other way around.
Test the Model with Real Scenarios
What if revenue drops 10%? What if you shave 5% off admin costs? Scenario testing helps you pressure-test the plan and clarify what truly moves the needle.
Revisit Monthly, Not Annually
Budgeting backwards isn’t a “set and forget” exercise. Revisit monthly. Adjust based on what’s real — not what you hoped.
Psychological Perspective
This shift is both strategic and psychological. Many SME owners equate “busy” with “on track.” Revenue gives a dopamine hit. But profit is quieter and often delayed.
Starting with profit brings clarity and boundaries. It helps you say no to distractions, vanity projects, or clients that don’t serve the bigger purpose.
It also creates a stronger sense of control. In flat or unpredictable markets, knowing what you need to keep is far more stabilising than chasing what you hope to earn.
This model also helps reduce guilt around spending, because you’re not guessing. You’re deciding with intention.
HR Best Practice
From an HR perspective, backwards budgeting supports healthier decisions around hiring, compensation, and resourcing.
Key practices -
Design roles based on return on investment, not just perceived workload
Share the budgeting logic with senior staff, so team planning aligns with profitability goals
When headcount is tight, invest in skill development that increases internal efficiency
Involve team leads in scenario planning - let them see how small changes impact big results
It also helps avoid the burnout trap hiring too quickly in response to revenue spikes that don’t translate into profit.
Red Flags to Watch For and Mitigate Against
Traditional budgeting can mask deeper problems. Watch for
Budgets based on last year’s numbers + inflation, without questioning value
Revenue projections that are optimistic, but untested
Profit targets being “whatever’s left over” instead of intentional
Spending increasing every time revenue rises, regardless of margin
Team assuming that “if we have the money now, we can spend it”
Remember, today’s revenue might not cover tomorrow’s obligations. Budgeting backwards protects you from that shortfall.
Narrative Story
Meet Tai from Napier
Tai runs a small civil engineering consultancy in Napier. For years, he based his budget on a 15% revenue growth assumption. Some years it worked. Others, it didn’t. Profit was inconsistent. Stress was constant.
After a tough year where profits vanished despite solid revenue, he flipped his approach.
He asked himself “What profit do I need to build reserves, reward my team, and sleep at night?”
He landed on $200,000.
Working backward, he mapped essential costs, trimmed unnecessary subscriptions, paused a non-performing service line, and stopped hiring “just in case.” His new revenue target? Slightly lower than before, but far more strategic.
In the following year, he hit his profit goal and had his first mid-year bonus reserve in five years.
Tai says - “I used to chase numbers. Now I plan for outcomes. It’s not just more efficient - it’s calmer.”
Golden Nugget
Profit isn’t what’s left over - it’s what you build toward on purpose.
If you’d like a confidential, free of charge, free of obligation conversation about your business, here’s how to get me.
📞 Phone +64 275 665 682
✉️ Email john.luxton@regenerationhq.co.nz
🌐 Contact Form www.regenerationhq.co.nz/contact
If you’d like to read more RegenerationHQ thinking on SME business and other things, go here – www.regenerationhq.co.nz/articlesoverview
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