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Budgeting for Success

2009 is proving to be as difficult as was forecast, and everyone is looking for ways to cope with the slowdown in business. It's now critically important to manage your cash flow effectively and last month we provided advice and tips for keeping track of, and improving, the flow of money in and out of your practice. This month we zero in on the budget, the other key tool you need for balancing revenues and expenses so you can be profitable, and for timely information in case you must cut back to bring expenses in line with reduced revenues.

Budgeting for Success

A surprising number of professionals do not prepare a yearly budget for their firm, basing instead most of their financial decisions on the balance of their chequing account combined with a quick tally of outstanding client invoices, work in progress that can be billed in the next couple of months, and total average monthly expenses.

This ad hoc approach has many pitfalls: when times are good and cash is flowing freely, you may not be very profitable, or may even be losing money, and you wouldn’t know it. Without long-range financial planning firms also pass up on opportunities to improve the practice because they don’t have the money on hand for significant outlays like a new website, leading-edge software, or to hire a practice assistant that will free owners to do more marketing and business development or more professional work of higher value.

When times are bad, like now, lack of financial planning and monitoring tools is downright dangerous because you can’t see problems brewing ahead, so you are left with little or no time to react and prevent a full-blown crisis by cutting back on expenses or stepping up marketing and sales in a timely fashion. 

Budgeting Basics

Creating a business budget for your practice is similar to preparing budgets for client projects and the process whether you're a sole practitioner or a firm with 5, 15, 50 or 500 employees.

• You can use existing records or you can create the budget from scratch. The more data you can access from existing accounting/bookkeeping records, the easier and faster the process will be and the more accurate the resulting budget.
• Accuracy and usefulness will depend on the data you enter, the breakdown of the categories and the amount of detail you enter and the adjustments you make for future changes – i.e. rent increases, currency changes, inflation.

Building the Budget – The Process

• Step 1: Gather past and current financial data
• Step 2: Build your budget template. Use your P & L statement and/or the data you gathered as a guide for establishing the sections and categories.
• Step 3: Enter known revenues and expenses into the corresponding sections, categories and months
• Step 4: Forecast/estimate other future revenues and expenses.
• Step 5: Adjust for trends
• Step 6: Calculate/review the profit figures

Using the Budget to Analyze Financial Performance

• Every month, after reconciling all bank and credit card accounts print a Profit & Loss statement for review and compare it with the budget. Compare the projected amounts with the actual revenues and costs.
• Look carefully at the variances and seek to understand why you're ahead or behind - this is the whole point of budgeting.
  • Have you made a mistake, something that can happen, especially with the first budget you prepare?
  • Are the changes indicative of an internal issue, such as out-of-control costs, changes in the type of work or projects, or the results of a marketing campaign?
  • Do changes reflect an external situation such as a boom or a downturn in the economy or in an industry?
  • Take action once you understand why actual results vary from those you projected. One key reason why companies get into financial trouble is because they fail to act on the information available...

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What's New @ Oomph

• We have addeed new content to two of our most popular programs "Marketing Your Firm' and 'Budgeting and Cash Flow Planning 101'.
  • As veterans of two major market slow downs - the real estate crisis of 1988-1992 and the dot.com meltdown of 2000-2001, we've learned how to find new markets in order to replace those that have vanished and how to tailor and package services that can be sold in a recession to past and existing clients. 'Marketing in Tough Economic Times' contains lessons, strategies and a wealth of tips to help firms through the credit crunch of 2007-2009, in addition to the program's standard marketing overview. Program details here.
  • Many practitioners have asked for information on how to set up a financial management system and on the types of activities that need to be conducted on a monthly, quarterly and annual basis. We've added the content to our popular 'Budgeting and Cash Flow Management 101'. We have added a chaper on managing cash flow in a recession.  Program details here.

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Next Issue

Believe it or not, there are benefits to be gained from a recession. Upheaval and realignment often make standard services obsolete and provide an opportunity for creative firms to device new, innovative services. With the right plan, it's possible to emerge with new clients, or with a toehold ion new markets. The slow down provides practice leaders with the time they need to carry out a complete practice review and implement changes and new systems that will help propel the firm to the next level when business picks up.  Tune in to see what's involved in a strategic review and planning process. 

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