Financially Smart Habits to Start
By Marc Derstein, CPA, Managing Partner
If you look at the habits of financially successful people and well-run businesses, you will see budgeting and revisiting budgets show up more times than not.
Strategic budgeting is much more than taking last year’s actuals and rolling them forward with a bump up here and there, a well-planned budget has the elements of:
- Historical revenues and expenses
- Zero-based budgeting
- Strategic increases or decreases based on planning
- Sense of business outlook and opportunities
A budgeting system that I have found to be successful is to start with last year’s historical information month-by-month as an outline, and then use independent sources to develop your organization’s most key income and expense projections. For service companies this would be fees and staffing expenses. For a manufacturer it would include customer sales, cost of goods sold to support those sales and required employee costs.
If your business has cycles, as most do, the prior year activity can help allocate your monthly recognition of income and expenses.
Most budgets come down to having a good system to develop revenue, staffing costs and cost of goods sold. The rest is small stuff, and as they say, don’t sweat the small stuff.
After these pieces are in place, take a critical eye to your budget. Just because you had that expenditure or revenue source last year, doesn’t mean it belongs there this year.
Ask yourself:
- How does that revenue or expense support our core business?
- Does it promote growth or does it represent an entitlement set into your business?
Some companies go as far as zero-based budgets. This is where every line item starts at zero and needs to earn its way into the budget. I would suggest this could be a good exercise periodically.
In the absence of a budget we tend to just look at this year versus last. That’s fine if this year is humming along, but too often without a clear map, businesses cannot see their financial problems early enough. By having clear expectations set through a good budget process that reconciles back to actual, you can understand timing differences and when you really need to be concerned.