Budgeting - How to Budget
A Business Budget Will Keep You From Being Swept Overboard
Whether as CEO of my own company or as a member of a not-for-profit board, I always thought of a budget like the rails on a ship or boat. Most of the time, the rail is just there, doing nothing. But in times of turbulence, rails keep you from falling overboard. Budgeting is not something that shows up naturally; you must force yourself to budget. It should be done toward the end of the year for the following year, or right now if you don’t have one. If it’s only you and a bookkeeper, forget the bookkeeper. You do the budget. You may confer with the bookkeeper once you’ve drafted the budget, but recognize that this is a management job. Budgeting is a basic business management tool.
Budgeting Requires a lot of Thought
A budget is just as important as a business plan. Budgeting takes time, but it’s not terribly difficult, especially if you have good financial statements to work with. Use software such as Intuit’s QuickBooks or Quicken if you have a fairly simple operation, or full-blown accounting software if your enterprise is large. The first step is to simply line up all of the chart-of-account lines from a prior year, and then fill in the anticipated numbers for the year ahead. This is simple, conceptually, but it takes thought—a lot of it. Simply slapping on an increase percentage formula isn’t budgeting. You must examine each line, getting input from your employees. You can’t think of everything, and employee input is vital. You may think it’s okay to plug in the same number as last year for copier costs, but when an employee points out that the copier has been acting up and getting worse by the day, you need to make note of it. Remember, I’m talking about the first draft here; someone needs to research a new copier and its costs. Because the business has grown, you might discover that you need a much bigger copier with lots more features, and that all this will add a few thousand more to the budget for next year. Better to discover that now than to create a budget gap that will show up mid-year because you didn’t anticipate the new costs. Many budget entries require quite a bit of research before you can plug in a realistic number. Insurance is a big one. Contact your broker to see if market conditions or increased risks will raise your premiums next year. I just read that the average health insurance policy is increasing nine percent. You might need a soothsayer to figure out how to budget your health insurance premiums, but always put in a large increase for this budget line! For every single line entry, ask yourself, “Is there any reason this should change, up or down, next year?” Be rigorous.
WK – “Who Knows?” – A Key Expense Budget Line
You may call it “unanticipated expenses,” which is exactly what the line means, but always plug something like this into your expense budget. Make it a healthy figure. It helps to have a line like this when something out of the blue happens to another line in your budget. This is where you get the numbers to keep the budget on track. If you were diligent in anticipating expenses, the WK line should come in at the end of the year with a lot of money left there. I know a guy who has a car-towing business. On the front of his truck is the inscription: “Shit Happens.” It does.
Income: Budget and Business Plan Distinguished
On the income side of the budget, I recommend using caution. This is a budget, not a business plan, and if your business plan has exciting (but realistic) sales projections, good budgeting demands that you be conservative. By all means, work your business plan and shoot for the big numbers; just don’t budget that way. Think hard, and ask a lot of people a lot of questions about your anticipated revenue. Knowledge of your market and existing customer base is crucial. The stability of a revenue stream can be severely upset by an unanticipated problem in your customer base. My old company did a lot of business with state and local governments. Over the years, when tax revenues took a hit because of the economy, our top and bottom line took a hit as well. Make sure your business plan addresses any problems of too much market concentration. In the wicked winter of 2011, businesses in the Midwest saw their budgets challenged because of the constant snow and ice storms. Superstorm Sandy turned many a business in the Northeast on its ear in October of 2012. Business interruption insurance will cover a lot, but not everything. Conservative revenue figures in your budget will smooth out jolts to your income.
Budgeting may be a pain, but it's a pain that you must endure, lest you get hit with the greater pain of facing the unknown.
This article is excerpted from the book The APT Principle: The Business Plan that You Carry in Your Head, by Russell F. Moran
Copyright ©2012 by Russell F. Moran