How To Help Budgeting Be Less Painful
Written by Joseph Toppi
Whether it is with personal or business finance, budgeting can be a struggle, time consuming, and sometimes down-right complex; not to mention the uncertainty and the questions that come up when thinking about making a budget. For example:
“What do I include?”
“How much should I budget?”
“How do I follow my budget?”
Budgeting does not have to be painful, and it is vital to running a business. Being diligent with a budget can also be the difference between profitability and insolvency… direction and chaos… predictability and guesswork.
There are different types of budgets, but for this article we are going to take a look at an overhead budget, and answer the questions above.
What Do I Include?
To best answer this, we must first look at what overhead is. In the simplest form, I define overhead as “the amount it takes for a company to be in business with no work going on.” If there is no work going on in your business, what are the things you would still need to be paying – rent, utilities, sales person, CEO, etc. Without knowing what to include in your overhead budget, you could inadvertently be charging too little, and hemorrhaging money. It is important to make an extensive list of the overhead of your business. Some commonly missed items on an overhead budget are:
- Warranty & Service
- Un-billable Hours or Indirect Labor
- Professional Fees (lawyer, accountant, etc.)
- Estimating & Bidding
- Indirect Materials
- Company Events
- Bank Fees & Interest
- Company Apparel (and other promotional items)
If you are unsure on what to include, ask yourself the question: “If I had no work going on, would I need…?”
How Much Should I Budget?
The amount you should budget per line item is going to be different for every company. The best way to get started knowing what to budget, is to look at the previous couple of years’ income statements. The income statement is broken into revenue, costs of goods sold, and expenses. The items under expenses are what your overhead is – for the most part. Take the line item amounts as your starting point, then ask yourself a few questions:
“Based on my goals set for the year, will this be enough?”
“Was I efficient last year spending this amount on ‘X’, or can I decrease my budget through better efficiency?”
“Do I anticipate a growth – or lull – season that I should account for?”
Do your best to be as accurate as you can be to achieve optimal control of your business’ profitability.
How Do I Follow My Budget?
Just like with goals, a budget can only be achieved and followed if it is before you, and the progress is tracked. The simplest answer is data tracking and budget-to-actual records. Let’s take a look at each of these.
Data Tracking – This does not have to be complicated or stressful, but does take diligence and a good system. It starts with discipline from the business owner to ensure that the expenses are accounted for, followed by good bookkeeping that allocates these expenses to the right line item. A good bookkeeping software will be able to track this for you, as long as it is entered in correctly by the bookkeeper. That is why it is so important to have a good bookkeeper, and bookkeeping system.
Budget-To-Actual (BTA) – This is done by taking all the data you have tracked, and putting it into a program or spreadsheet next to your budget. Having the amount budgeted next to the amount actually spent allows you to see where you are. Updating and reviewing your BTA often allows you to make more budget friendly decisions, and will lead to more control over your budget. For example, let’s say your Company Apparel budget for the year is $5,000, and in September your BTA shows you have already spent $4,500 on company apparel, then you can make better choices on how much winter clothing you are going to buy.
Without creating a budget, tracking data, and compiling it in a way that allows you to review it; you are running your business blind. At that point, the financial aspect of your business – and it’s profitability – is just a guess.
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