Call me a nerdy numbers guy, but at NPS this isn’t the holiday season, it’s the budgeting season.
Did your eyes glaze over at “budgeting”? Did your brain immediately go to “I can’t be fenced in by some bean counter, telling me how many pencils we get to buy next year!” Then I accept your challenge to make a budget mean more than a numerical slap on the wrist.
There are a fair amount of budget avoiders and skeptics out there. To those folks, I call on Winston Churchill, who paraphrased founding father Ben Franklin when he said, “He who fails to plan is planning to fail.”
Your Budget Is a Tool—Not a Stick
To the small business owner who shies away from creating written plans and formal financial projections, I ask, “How’s that working for you?” If money is coming in hand over fist, and your bank balance climbs higher and higher, more power to you. I won’t say anything to sway your opinion.
But maybe you’re like the rest of us. We’re running operations with ups and downs, and sometimes wonder if there’s a better way. For us, a budget can be a great tool to help us manage our business.
I don’t have the space to walk you through building a budget here. (Get in touch with me if that’s something you want.) Instead, I’ll walk you through one of our must useful exercises.
Turning Numbers into Good Decisions
One of the important building blocks in a budget is the distinction between mandatory and discretionary spending. This is especially true if there are multiple owners or business partners. After all, one person’s “must have” is often another person’s “nice to have.” Here’s the homework assignment we give our clients—and you can do with or without us.
- Figure out how much you spent last year with every vendor. In QuickBooks, run the report called “Expenses By Vendor Summary.” Select a date range that gives you 12 months of activity. It doesn’t have to be a calendar year, but it should include as much of the current year as possible. Make sure you run the report on a cash basis.
- Create a report you can work with. If you’re an Excel whiz, export your data into Excel. Otherwise, print a copy. You should be looking a list of vendors in alphabetical order, with a dollar amount next to each name.
- Quickly separate the “must spend” from the “nice to spend” Items. As you review each vendor, and how much money you paid last year, ask yourself, “Did I have to spend this money to run my business?” If the answer is “yes,” then write “must spend” next to their dollar amount. If, upon reflection, your business would have been just fine without this vendor, then write “nice to spend” next to them. Do this quickly and don’t overthink it. Go with your first response.
- Notice where you should have spent less. If you examine the vendor and the answer that pops into your head is “I needed this vendor last year but wish I hadn’t spent so much,” then write “must spend but spend less” next to their name.
- Notice where it’s hard to tell, because some could be either. For most of my clients, there are a handful of vendors for whom it’s difficult to make the call. Good. Leave them blank for now. We’ll return to them later.
- Review, reflect, and move forward.
a. Those vendors on the “must spend” list will be part of your budget.
b. Where you see “must spend but spend less,” determine if you spent too much because of their prices or because of how many services/products you consumed. If it’s price, consider switching to a less expensive provider. If it’s a matter of over-consumption, have a conversation with the vendor on how to work together more affordably next year.
c. Where you see “nice to spend,” exclude any vendors that upon reflection strike you as unnecessary or wasteful. For the others, note these line items in your budget as ones to carefully monitor.
d. Now look at the blank ones. Let these help you understand how you think as a business owner. What insight can they offer on how you define mandatory and discretionary spending? This part of the exercise can be especially important among business partners. You may discover you have different assumptions about what is important for the business.
This is just one step in building a budget. I hope it shines some light on how you operate your business. I also hope you uncover a few surprises. If you want help with this process—or anything else involved in budgeting—please let me know.
Wishing you lots of positive cash flow!
What Can I Learn Today to Improve Our Financial Performance?
You can hear when an engine is running smoothly—or racing or sputtering. The same is true for the financial drivers of your business.
You just need to know what to listen for. The good news is that your numbers are talking all the time!
Here are the best ideas we can find on how to ask your business for the information you need, to understand what it says, and take action on what you learn.
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What’s on Your Reading List?
- The E-Myth Revisited: Why Most Small Businesses Don't Work and What to Do About It, by Michael E. Gerber
- Profit First: A Simple System to Transform Any Business from a Cash-Eating Monster to a Money-Making Machine, by Mike Michalowicz
- Managing by the Numbers: A Commonsense Guide to Understanding and Using Your Company’s Financials, by Chuck Kremer, Ron Rizzuto and John Case