Budgeting – Concentrate on Important Items

Last week I talked about making sure you pay yourself first.  If you missed that post, you can read it HERE.  This week’s topic is concentrate on important items.  We all have the same amount of time to spend on our lives.  Don’t waste time over analyzing budget items that are not significant issues to your business.

A budget by nature is an estimate.  There is no way you can know everything that will happen in the coming year.  With that in mind, you need to focus your time and energy on areas that are going to have a significant effect on your business.  The key is finding that point where you have done enough research so that you have numbers that will help you as you go through the year.  There are two ditches to avoid.  The first ditch is what I’ll call the Crammer.  The Crammer waits until the last moment and tries to get everything done very quickly without putting a lot of thought into the results.  (You can avoid this by creating a schedule, see the post HERE.)  The other ditch is what I’ll call the Deep Analyst.  The Deep Analyst is still working on the numbers trying to get them perfect in April.  You don’t want to be in either ditch.

To help keep you out of the ditches, here are several areas that you should spend the most time and energy on when preparing your budget.  The first area is revenue.  Getting revenue right is the key to preparing an effective budget.  If your revenue is off, the rest of the budget will also be off.  If you budget too much revenue, your expenses will be budgeted too high.  You can get behind quickly by spending too much, even though your spending is in line with your expense budget.  If you budget your revenue too low, you might not have enough resources to support your sales.  Customer service could suffer, negatively affecting your customers.

Give yourself enough time to look at how your revenue trended the prior year.  When you are looking, make sure to include these questions in your analysis.  Did anything happen that you are going to have to address in the coming year?  What did you do really well that you want to repeat or expand?  Many people look at problem areas but don’t look at what they did well.  Are you aware of any factors that are going to affect your budget in the coming year?  Do you need to make pricing adjustments to your product (up or down)? 

Typically, you have more expense items than revenue items.  Don’t short change your revenue analysis because of the volume of expense items you have to budget.  The first two expense items that you want to look at are costs that directly apply to your sales and your advertising/marketing costs.  These items are going to help you with your revenue.  Take time with these to ensure you are being efficient and effective with your efforts.  These are good areas to invest your time in.

Another area you want to invest your time in is your wages, benefits and insurance.  Make sure you have enough staff and you are paying them a fair wage.  When you select good employees, pay them well and treat them well, it will cost you less in the long run.  It takes time to find and develop good staff people.  Time you spend working with your staff or paying someone to train the staff, is time not being spent directly benefiting your customers.  Benefits can also be a significant cost, find a good broker to work with and start early on your renewal.  The broker should do most of the work for you, your job is to define the parameters and make the final decision.  The same thing applies to your business insurance.  Brokers are paid to write your insurance, give them good direction and let them do their job.  Remember that part of that good direction is setting a deadline for them that allows you to review the information and look at alternatives if you aren’t happy with what they present to you.

You will want to invest your time in any large components of your business that don’t fall into the previous categories.  For instance, if you run a swimming pool, you will need to look closely at your water consumption.  Or if you are running an apartment building in an area that has a long, cold winter, you will need to pay attention to heating costs.  You know your business well enough to identify these items.  Check your income statement if you have areas that you want to verify.

If you have large capital expense needs (equipment, buildings, vehicles, computers, etc.), make sure you take enough time to research what you need and how much it is going to cost.  I recommend doing this on an ongoing basis so that when budget time comes you already have your research competed.  Don’t forget to keep track of when your existing items are going to need replacing or expensive maintenance.  You don’t need any surprises with predictable expenses like this.

The remaining items will need to be addressed, but not necessarily in depth.  Office supplies are a good example.  For most businesses this is not a large category from a cost standpoint.  After a quick check to make sure your employees are not hoarding supplies in their workstation, you can make your projections using historical numbers.  Use this method for other categories that you have not already completed.

Using these examples will help you make good choices on how much time to spend on the items in your budget.  Schedule enough time to give yourself a well prepared budget to use to guide your business.  It will help you put more money in your pockets!