Shall we call it a Budget or Spending Plan?

I like the latter.

For those who like to spend, "Budget time" might sound like a ball and chain, a rein to be pulled by someone else, a collar that restricts. Do I have more analogies? Probably, but I think you get my point.  It's October and that is the time I bring up the word "Budget" with all of my clients. "Time to create next year's Budget!", I say gleefully. You see, I like budgeting.

The way I look at it, all of the dreams of a business owner finally may be quantified and documented in that financial kind of way, so they can be actualized. No more frustration that "all we do is talk about things but we don't ever DO them". So here's how I frame it:

• Let's pick a Revenue Goal for the year. 
• Are we shooting for Growth? Stability? Gimme a number.
• How will we go after that Revenue? 
• Anything different than the status quo? If so, it costs money. How much?
• Exactly what will we do differently? New Sales or Marketing approaches? How much do those cost?
• Do we need more people at our business to handle the Revenues? If so, when do we bring them on? (It's easy to calculate if we know the capacity of our current employees.)
• Any new laws that might cost us? (i.e., Obamacare, Healthy San Francisco, increased Workers Comp.)
• Any new benefits we want employees to have?  (i.e., 401(k) match, commuter checks, life insurance)
• Are we expecting to give our employees' raises this year? (If it's been awhile, consider it.)
• What about our Fixed expenses? Are they expected to increase? If so, build it in. (i.e., Rent increases, may be contracted already.)
• Review all Indirect costs to see if they are tight. In good times, expenses such as phones, office supplies, travel, lodging, trade conferences and "Misc." may run away. Pull them back in lean times.
• What new business do we want? What is the "dream" that we've always wanted to go after? Pick it apart, create a roll-out strategy and then quantify all of the costs on a monthly basis. Put these numbers in the Budget.

The idea is to create a Spending Plan on a monthly basis. This is a bit easier for those who have been in business for years because there is history to look at and build from. For new businesses, you have to put on your imagineering hat and input numbers. "Just make it up", I tell people all the time. Nobody gets hurt when it's just on paper.  Create it in Excel and use your Chart of Accounts. Be sure every category has a number for every month. Create a list of Assumptions so you can do a sanity check later. Trust me, you'll need it to remember how you built the thing.

Involve others in this process. Don't crawl up to your Ivory Tower and build it alone. Get input from those who will have to create the Revenue and spend the Expenses. That way, you have the mighty "buy-in" that everyone talks about. It's easier this way: they build the numbers. Much more fun to follow what they built then be handed some seemingly random number with the command: Do this. Ugh. Bad idea. Involve the management team and their staff whenever possible.

Now, if the sum total of the expected Expenses far exceeds the expected Revenues, you may all have to get out the eraser and re-think the Expenses. That's right. It's an iterative process. That is, unless you fully expect to lose money for a period of time and have your bankroll/funding idea already in place (i.e., bank loan, family and friends' or your own money ready to fund any losses/red ink). Just know that whatever tale you tell on paper-- however rosy it is there -- it usually doesn't get better in reality. You could get lucky and hit the idea of the century, but don't plan for that kind of success. Over-estimate Expenses a little and under-estimate Revenues, too.  Good chance, you'll be fine by year-end if you plan well.

Mid-way through the year (June), I suggest you take a look at your Budget and review your assumptions and the numbers for the balance of the year (July-December). If you have made any poor assumptions at Budget creation time, fix them now and call it the "Revised Budget". You may have new information now that you didn't have the prior October. Work with and communicate the changes to your management team. They, in turn, can tell their staff so everyone is working toward the same goal.

If you find by the end of the year that you weren't even close (huge budget variance), don't worry, you'll get another chance next year. If you need help finding and fixing the errors, look around for a business consultant or speak with your accountant (especially if they have operations experience). Point is: get help.

Live and learn and spend wisely.  Happy Fall and Happy Budgeting.