A well-managed budget is not only a critical tool for expense management, but can also help you with business-process improvement. Yet it's challenging to make estimations when today's business world is so fluid. These six tips can help you better manage your budget in 2019.
1. Monitor vigilantly.
Technology makes it easy to monitor the numbers monthly, weekly and even daily. James Feldstein, president and owner of <a href="https://audioden.com/" rel="nofollow">Audio Den in Long Island, New York, says small businesses like his can get data fast now without big costs, thanks to new tools.
“We're at a point large companies were a few years ago—we can see things much earlier and correct them," he says.
Feldstein, who's owned his custom electronics design company for more than 25 years, uses an entrepreneurial operating system specific to his industry. By monitoring the daily money that comes in, labor costs and bills due in the next 30 to 60 days, he can make adjustments.
“I can look at trends and analyses because I have the information at my fingertips," he says.
Regular monitoring can help spot indicators that are early warnings, says <a href="http://alexglassey.com/" rel="nofollow">Alex Glassey, a Victoria, British Columbia-based business adviser, instructor and coach. Too often, business owners continue to work based on assumptions they made months ago, he says.
“If the revenues are higher or lower, you can make rapid adjustments to expenses to either expand or curtail the budget," Glassey says.
2. Immerse yourself in numbers.
Glassey believes it takes about a year of watching the numbers to truly understand them—but once you do, they become much more intuitive.
“Having confidence in my numbers and my growth comes from spending time with the budget every week," he says.
You have to prepare when things are good—before you hit disaster.
–James Feldstein, president and owner, Audio Den
While accounting software makes expense management convenient and easy, it doesn't make budget management intuitive for the business leader. Do your accounting by hand—using a ledger—for two to three months. That's what Robin Lee Allen, managing partner at New York-based private equity fund manager Esperance Series, LLC, recommends to entrepreneurs.
“You'll get an extraordinary insight into how the business functions at the cost level, and also be able to make connections that were not available before," says Allen, whose company specializes in turnaround situations.
Doing the accounting by hand doesn't mean the bookkeeper or accountant shouldn't continue tracking with software. Rather, it allows you to get a better understanding of how the budget works and enables you to ask the accountant the right questions.
“If a person is diligent about it, it can be revelatory," Allen says.
3. Forecast based on data.
A common mistake when forecasting revenue is to “fly by the seat of your pants," says Robert Morlot, managing partner at Florida-based <a href="https://www.clearwaterbusinessadvisers.com/" rel="nofollow">Clearwater Business Advisers, LLC. Often times, he says, businesses estimate revenue based solely on last year's income—for example, by adding 10 percent.
“That can be a big mistake," says Morlot, whose consulting firm works with small, middle-market and startup business owners and executives. “If the market conditions fall hard in the coming year and you've forecasted a rise in revenue, you're opening yourself up to danger."
To avoid projections based on erroneous data, Morlot recommends using metrics such as economic forecasts. Even if smaller businesses can't afford to buy these metrics, he says you can determine local indicators, especially after being in business for a few years.
“If you ask the right questions, you can discern these indicators based on observations and the local economy or local community," he says.
4. Plan for contingencies.
Even with the best of forecasting and diligent monitoring, things don't always go as expected. Morlot says it's important to ask yourself: What can go wrong? You need to consider scenarios such as losing a major client or having an unexpected production shutdown.
When he worked for a division of an international consulting firm, Morlot started this process by engaging his leadership team. They made a list of four to five items that could go wrong, then ranked their probability from low to high, along with their impact. This helped create the most likely scenario and discuss what they could do about it.
“We did that in advance so we were not surprised," he says. “It should be objective and succinct about how you'd approach it if things go south."
Having weathered several downturns and the financial crisis of 2008, Feldstein says one risk many small-business owners face is “living on the edge." Rather than building up cash and preparing for a rainy day, they spend it on things like their personal lifestyle.
“You have to prepare when things are good—before you hit disaster," he says.
5. Tread lightly through growth.
Many owners and executives work toward business growth, but make the mistake of not accommodating for growth in the budgeted expenses. Allen notes that even fixed costs are not truly fixed when a company is successful and continues to grow.
Let's say you're ramping up factory production. Fixed costs like utilities are likely to go up. Or perhaps some employees work overtime—even if they're salaried, you may have extra expenses like buying them pizza on late nights.
“The rate of fixed costs may exceed the rate of revenue growth and that means your profit margins are steadily dwindling away," he says.
His solution? If you're a growing business, add 15 percent to fixed costs.
6. Be transparent with your team.
Another common growth challenge is prematurely hiring more employees.
“It's easy to hire people and spend more as the business is growing, but if the business shrinks, it's much more difficult to downsize and turn off the tap," Glassey says.
Rather than hiring prematurely, give current employees small raises, Allen recommends. This helps avoid disenchantment among employees.
And be prepared to explain to them that the business “hasn't reached the level where hiring another employee is fiscally feasible."
“You're courting mutiny if employees don't know why they're not getting help while their job is getting harder," he says. “There's a social side to growth—managing employee expectations."
Photo: Getty Images
