The Budget As A Strategic Operations Tool

     Your budget is a strategic map for your business operations.  A new budget can identify where you’ll allocate fiscal resources, how much you’ll allocate and what you hope the final results will be.  Last year’s budget is your point of departure. Review becomes preview.

            Ideally, you’ll review what you prepared last year repeatedly throughout this year to make it more realistic when you adapt, expand and weed out for next year. By doing so, you’ll expose funds allocated to budget categories (small or large) that might no longer be appropriate or applicable. 

Here are some examples:

You might know now you need to buy a new machine – a drill press -- for manufacturing operations, one that could cost $5000.  Some due diligence indicates that for $4000, you can buy a machine that will meet your needs now and for future growth and leave you $1000 for something else.  The “newly found” $1000 might pay for facility upgrades, new wiring, and reallocation of shop floor space or new wall construction that may be required to make space for the new drill press.  Or, let’s say you anticipate that you may experience challenges in installing new equipment and have to find another $1000 in the budget for that installation.  The exercise of mapping the scenario makes good use of the one tool that assures you can identify what you’re going to need and where that money may come from.

            It could be that this year you were required to spend capital that was not forecast or planned. Maybe you were lucky enough to have some available money in another budgetary category that allowed you to transfer funds and pay for the unforeseen expense.  More than likely, however, you did not have that cushion and either had to take out a specific loan or draw from your line of credit. Now neither is a bad thing. But how much better to plan for them in advance?  

Now is the time to add that cushion to next year’s budget so you’re ready to deal with unforeseen equipment breakdowns, facility repairs, new information technology needs or even taking advantage of a new purchase that was unavailable last year. 

            So what about expenses you can weed out? Think about a journal or magazine subscription that now comes digitally at a lower price; fleet repairs to older vehicles that you replaced with new ones that have four-year bumper to bumper warranties; or professional association dues when you’re really not participating any longer.  There are specific categories that are ripe for budget savings. One is logistics.  Commonly, adjusting freight costs, postage costs, and expedited delivery charges that, if not needed or necessary, can result in significant cost savings that go directly to the bottom line.   

           Another is excess and “just in case” inventory.  Do you need your entire inventory?  When was the last time that you sold that particular item or category of items?  Perform a Pareto Analysis (ABC Analysis) on all inventory to identify those that are taking up shelf space yet not selling.  Shrinkage, damage, and product obsolescence are other factors to consider in maintaining ideal inventory levels. In fact, sometimes the expansion and extra space that you thought you needed is indeed unnecessary. Reducing inventory can free up not only working capital, but also warehouse and shelf space for other products.

Developing and following a budget instills fiscal discipline and good control over the overall operation.  Yes, I know: Budgeting is sometimes hard to begin and requires self-discipline. We’ve all succumbed to wanting something that may be “nice to have” but not essential to overall operations.  Developing a budget is  the first leg of your financial roadmap to success.  Get going! You will be surprised to see how it affects both successful income generation and keeping money in the bank!

 

 

Making a List, Checking It Twice: Your Chart of Accounts Is Indispensable to the Budget!

              The chart of accounts lists all of the necessary budgetary accounts that you use in your business; they are included in the general ledger of an organization.  Detailing your chart of accounts is one budget exercise that will take some time. By devoting enough time, you’ll clearly identify where your money comes from and how it is accounted for in your accounting system.   You’ll use the chart to aggregate information for financial statements.

            Let us give a simple example. There are many others, but this example shows you the relevance of the approach.

            Assume that you have identified accounting classes for the following four categories:

1.    Assets:

§  Cash

§  Marketable Securities

§  Accounts Receivable

§  Prepaid Expenses

§  Inventory

§  Fixed Assets

§  Accumulated Depreciation

§  Other Assets 

2.    Liabilities:

§  Accounts Payable

§  Accrued Liabilities

§  Taxes Payable

§  Wages Payable

§  Notes Payable 

3.  Stockholders' Equity:

§  Common Stock

§  Retained Earnings 

4.       Revenue:

§  Revenue

§  Sales returns and allowances (contra account) 

5.       Expenses:

§  Cost of Goods Sold

§  Advertising Expense

§  Bank Fees

§  Depreciation Expense

§  Payroll Tax Expense

§  Rent Expense

§  Supplies Expense

§  Utilities Expense

§  Wages Expense

§  Other Expenses

With this simple list, you now have budgetary categories where you can document each expense in a clear and defined manner and track them over time.

You can also get very specific. Some charts of accounts go into explicit detail to document expenses.  Consider the advertising expense line item.  The hierarchy may expand like this:

            5.0 Expenses

                        5.2 Advertising Expense

                                    5.2.1 Advertising - Newspaper

                                    5.2.2 Advertising - Social Media

                                                5.2.2.1 Facebook

                                                5.2.2.2 Instagram

                                                5.2.2.3 Twitter

                                    5.2.3 Advertising - Promotional Products

            The chart then becomes a tracking system. If, for example, you are seeing that a large number of returns are occurring, your proper accounting of these returns helps you explore why are you receiving so many returned products and issuing credits for each product return.  Is the product defective? Was the wrong product sent? Was there an ordering error by the customer?  Did your firm send a substitute that the customer was unhappy with?  Not only does this ensure that your bookkeeping is accurate and correct, but now you can make inventory adjustments or resource changes to reverse a negative course and positively influence the bottom line.  

            Remember, we at Solomon Bruce Consulting LLC are NOT accountants or lawyers.  However, our work identifies issues that could benefit from the expertise of an accounting or legal professional.

So, make your list, check it twice, and keep us in mind for a third party review if needed.

Siri, How Do I Make Money and Keep More of It in My Bank Account?

          Your budget is a strategic map for your business operations.  A new budget can identify where you’ll allocate fiscal resources, how much you’ll allocate and what you hope the final results will be.  Last year’s budget is your point of departure. Review becomes preview.

            Ideally, you’ll review what you prepared last year repeatedly throughout this year to make it more realistic when you adapt, expand and weed out for next year. By doing so, you’ll expose funds allocated to budget categories (small or large) that might no longer be appropriate or applicable. 

Here are some examples:

You might know now you need to buy a new machine – a drill press -- for manufacturing operations, one that could cost $5000.  Some due diligence indicates that for $4000, you can buy a machine that will meet your needs now and for future growth and leave you $1000 for something else.  The “newly found” $1000 might pay for facility upgrades, new wiring, and reallocation of shop floor space or new wall construction that may be required to make space for the new drill press.  Or, let’s say you anticipate that you may experience challenges in installing new equipment and have to find another $1000 in the budget for that installation.  The exercise of mapping the scenario makes good use of the one tool that assures you can identify what you’re going to need and where that money may come from.

            It could be that this year you were required to spend capital that was not forecast or planned. Maybe you were lucky enough to have some available money in another budgetary category that allowed you to transfer funds and pay for the unforeseen expense.  More than likely, however, you did not have that cushion and either had to take out a specific loan or draw from your line of credit. Now neither is a bad thing. But how much better to plan for them in advance?  

Now is the time to add that cushion to next year’s budget so you’re ready to deal with unforeseen equipment breakdowns, facility repairs, new information technology needs or even taking advantage of a new purchase that was unavailable last year. 

            So what about expenses you can weed out? Think about a journal or magazine subscription that now comes digitally at a lower price; fleet repairs to older vehicles that you replaced with new ones that have four-year bumper to bumper warranties; or professional association dues when you’re really not participating any longer.  There are specific categories that are ripe for budget savings. One is logistics.  Commonly, adjusting freight costs, postage costs, and expedited delivery charges that, if not needed or necessary, can result in significant cost savings that go directly to the bottom line.   

             Another is excess and “just in case” inventory.  Do you need your entire inventory?  When was the last time that you sold that particular item or category of items?  Perform a Pareto Analysis (ABC Analysis) on all inventory to identify those that are taking up shelf space yet not selling.  Shrinkage, damage, and product obsolescence are other factors to consider in maintaining ideal inventory levels. In fact, sometimes the expansion and extra space that you thought you needed is indeed unnecessary. Reducing inventory can free up not only working capital, but also warehouse and shelf space for other products.

Developing and following a budget will instills fiscal discipline and good control over the overall operation.  Yes, I know: Budgeting is sometimes hard to begin and requires self-discipline. We’ve all succumbed to wanting something that may be “nice to have” but not essential to overall operations.  Developing a budget is just a financial roadmap to success.  Use it! You will be surprised to see how it affects both successful income generation and keeping it in the bank!