As we stated last month in the first installment (click here if you missed it), setting a company budget is the first step toward reaching financial goals. A budget helps with expense control, forecasting, and decisions that affect the bottom line. But a budget is only helpful if it is properly compared with other information provided by financial reports. Follow these three steps to successfully utilize these powerful tools known as budgets:
- Compare results to the budget. Most good accounting systems allow for the budget to be put in and track results. For example, QuickBooks has a report that has five columns: actual for the month, budget for the month, YTD actual, YTD budget, and annual budget. It’s one of the most helpful reports for managing business expenses and projections.
- Perform an easy variance analysis. Start with the revenue and/or margin expectation. Is the actual number over or under the expectation/budget? What happened? If it’s within 5 or 10%, that’s usually acceptable unless there are significant expenses coming up. When a budget is set by line item, it’s easier to see which issues need to be addressed when there is a variance, such as labor overages or materials cost variances.
- Share budgets and achievements with the management team to celebrate success or make adjustments. After all, we can’t expect people to meet certain criteria if they aren’t allowed to see the numbers they are producing. But be careful what is shared and make sure it’s the right information for the right recipient. For example, it’s probably OK to share revenues or even gross profit by crew with the entire team (promotes competition and morale) or sales by rep within the department. On the other hand, bottom-line profitability numbers generally should be limited to senior management.
Real world example
A client had a goal of achieving $4 million in revenue, yet was concerned about marketing expenses. Specifically, the client wanted to know if they were spending enough related to companies of their size, and how they should allocate the funds. The first step was to determine how much it would cost to accomplish all of the programs they had in mind and plan accordingly.
Detailing each expense helps the business owner visualize what is behind the number. It’s not just $40,000 in marketing; the breakdown of a budget figure creates accountability. Details provide guidelines to avoid the end of year question, “Where did the money go?!”
Here’s an example of breaking down the marketing budget by detail and month. The info below would be part of a budget spreadsheet.
Golf Tournament Sponsorship – $1,000 (May)
Website Update/Refresh – $3,000 (October-December, $1,000/month)
Consultant – $2,000 / month
Yellow Pages – $1,000 / month
Tradeshow Booth – $1,500 (June registration) and $1,000 August (actual event)
The client company will match expenses to the plan each month. If the beginning of a year is slow cash flow, the client can defer expenditures to coincide when cash flow improves. Also, if an expense isn’t in the budget, management can easily say ‘no,’ or decide to reduce another expenditure to stay on budget.
Finally, remember to track successes against the budget. For example, how many leads and closings resulted from the golf tournament sponsorship? Leads give an initial indication of the successful (or unsuccessful) exposure from the sponsorship. Closed leads help define the success of the expenditure and also provide feedback on what programs worked and which ones shouldn’t be in next year’s budget.
Budgets also help track expected inventory or supply expenses vs. actual, and employee expenses related to production or productivity. Taking time to manage budgets pays off, regardless of company size or type. Contact us if you have questions or want assistance at any stage of the process.