Category Archives: balance sheet

Marriage Counseling for You and Your Budget

It is the first month of the calendar year and for many, the start of the fiscal year as well. The first month for you to start measuring the results you assuredly planned and documented in a budget for the year.

 

Each of you has a different relationship with your budget. Each of the components of this relationship can lead to great results or negative ones, depending on how you react to them. Your reactions can impact your personal career as well as the health of the company you own or work for.

 

Read more about some of the pitfalls of budgeting and how to enhance your relationship with the budget to achieve the great results for which you planned.

Marriage Counseling for You and Your Budget

 

CEOs, Presidents and Executive Directors

If you created the budget while sitting with your accountant, made sure you were comfortable with the revenues and expenses, but have not communicated it to the managers and leaders of the organization, you have just cheated on your budget. My counsel is to get the budget in a presentable format to communicate to those who have a chance to manage day-to-day to help you achieve the results forecasted in the budget.

 

The message to your managers should include your overall strategy, backed by practical, measurable goals.  Your leaders need to believe in your strategy because if they do, your job of leading the organization to positive results will be so much easier.

 

I repeatedly hear, in large and small organizations, from managers, supervisors and those on the front line, that they have no idea what the monthly budget is for repairs to equipment, printing costs, etc. They are spending money based on one decision at a time without the benefit of the overall strategy. Without involving your managers in the process, you are not benefitting from their knowledge and experience.

 

Nonprofit Executives and Finance Committee Members

Can you answer these questions? If not, your budget package needs work.

 

  • How much does it cost the organization to run each program? Of that total cost, how much is covered by actual funding commitments and how much has to be raised to maintain the program(s)?
  • How much of your administrative cost – Finance, Accounting, Development, etc., is funded by direct reimbursement and/or the de minimis administration expense reimbursement in grant budgets? How much money has to be raised to cover these costs?
  • Does the budget package have one column for the Net Change in Assets/Income Statement and no backup schedules to show the Revenues and Expenses by program and grant? If your answer is yes, the budget package is one-dimensional. In other words, it does not provide the fundraisers and the Board the needed information to interact with potential donors and speak intelligently about the real needs that are met through fundraising. Many nonprofits go under when they issue one dimensional budgets to Finance Committees year after year. There is no clear understanding of the true funding requirements. Your fiduciary responsibility should lead you to ask for more transparency regarding where the needed funds for programming and administration costs will come from.

 

Finance and Accounting Professionals

Did you manage the budget process so that the budget is constructed the same way the detail accounting entries are made month-to-month? Most non-finance professionals hate to deal with anything that has “Budget to Actual Variance” in the description; add to it that you are explaining that the variances are because the budget has one type of accounting and the actual has another, and you are sure to cause irritation that is just not necessary.  It is like a spouse putting the toilet paper on the roll backward – it is irritating and just not necessary.  It is your job to keep the conversations and analyses about real differences and tie those differences to a real discussion that empowers the team to react and strategically move the direction as planned or make a decision to pivot. Here are some pitfalls to avoid:

 

Differences Between Finance and Payroll Practices

Large and small organizations find themselves with the ineffective comparison of budget-to-actual salaries, caused by Finance dividing the total annual salary by twelve for the monthly budget.  Payroll records the true payroll expense. Month-to-month variances result, as Finance budgeted for a full twenty-eight to thirty-one days and Payroll budgeted for twenty-eight or forty-two days depending on whether it’s a two or three pay period month.

 

Insurance

Insurance is typically paid in advance for the quarter or year. If it is material, it should be set up in a Prepaid Account. If insurance bills are expensed as paid, the month variance could be a result of those payments and not an actual expense overage.

 

 

Annual payments for subscriptions

These payments should be reviewed to determine materiality; determine if they should be set up in a prepaid account when paid, or if they are immaterial and should be expensed. When you mirror the actual accounting and the anticipated expense pattern in the budget you can avoid unnecessary variances and questions.

 

Sales Revenue

A company that is anticipating a large increase in revenue should determine how the increased sales and related cost of goods should be spread throughout the year in the budget. Consider the current pipeline and sales cycle when budgeting sales revenue. If your sales cycle is 120 days and there is $1 million in your pipeline at the end of the year, you will not realize $3 million in sales in the first quarter.  A fast-growing entity could possibly reach $12 million in sales for the full year, but it should not be spread evenly to each month. Patterns such as this will frustrate executives and sales staff and make them feel like failures. This would be the equivalent of us expecting our spouse to be Jeff Bezos and to increase our family’s net worth at the same rate.

 

Operations Executives

Make sure you are empowered with the right information to effectively run your department.  Do your best to work with accounting to submit invoices and information within their deadlines so they can process the data into information that you can review and use to communicate effectively with the leaders of the organization.

 

Try to manage potential budget cuts made throughout the year so the troops can stay focused on driving the overall strategy of the business.

 

Think of it like this great example in the Netflix series House of Cards (spoiler alert if you have not begun your binge watching of the series – sorry).

In this episode, Frank becomes President and wants to take funds from FEMA to fund a jobs program to put people to work.  The head of FEMA does not resign and tells his colleague he is not going to resign, as he is the only one who can manage the reduced funds and help those in need if a hurricane does hit after Frank took all the budget money. While the drama is critical for a successful Netflix series, you don’t want a similar drama playing out in your company!

 

Good luck with your relationship with the budget. Use my advice to help manage your fiduciary responsibility to the organization, as well as your duty to manage your career. Avoid the many aspects of “marital irritation” I have discussed by correctly managing Budget-to-Actual variances.

If you would like to discuss your relationship with your budget directly with me, please sign up for a complimentary 30-minute session through the contact link here.

 

Instant – Not Always Good

Instant rice and online banking have a lot in common. Instant rice is obviously quick, providing you with an immediate result. It works really well for casserole recipes or for certain dishes where rice and other ingredients are mixed together. But if you are serving dinner guests or in a fine restaurant, you expect the chef to put in the extra effort to serve gourmet rice prepared in an exotic way.

Don't just rely on point-in-time views. Take time to reconcile accounts.

Don’t just rely on point-in-time views. Take time to reconcile accounts.

As with instant rice, online banking provides instant information regarding your bank balance, making it a great tool for certain situations; however, if you want to use it as an effective tool to manage your daily cash flow, it requires the extra effort of being connected to a cash reconciliation process that is properly maintained and reviewed periodically.

 

Before the days of online banking, the standard practice for both personal and business checking accounts was to reconcile a check register to a monthly bank statement. When accounting professionals adopted online banking into their processes, organizations tended to forgo the discipline of maintaining a check register as part of their reconciliation processes.

 

The following is a typical conversation I’ve had when consulting with clients on accounting process improvements:

Accounting professional, with a bundle of unsigned checks, “This is our process for obtaining check signatures.”

 

Me, “How do you know you have enough money in the account to cover these checks? What is your procedure?”

 

Accounting professional, “I checked the balance on line this morning.”

 

Me, “Where is the reconciliation to the check register? How do you know that all of the uncashed checks will not deplete the entire balance?”

 

Accounting professional, “I know there are not that many outstanding checks.”

 

Me, “When is the last time you reconciled the account?”

 

Accounting professional – answers range from a year ago to do not remember (not good) – to yesterday or a month ago (which is good).

 

As with using instant rice, there are times when viewing online balances without going through the reconciliation process are appropriate, but it’s not the final reconciliation tool.

 

Let’s try an experiment: If you are a CEO or President of an entrepreneurial company or a Finance Chair of a non-profit, ask the accounting department for the latest bank/cash reconciliation of the operating account. Ask specifically for these documents:

  • The bank reconciliation
  • A copy of the bank document to which it was reconciled
  • The Balance Sheet balance to which it was reconciled

(Note: Publicly traded companies, financial institutions, insurance companies and other regulated industries have to maintain reconciliation procedures, so if you are in charge of one of those, regulation will take care of this.)

 

If you are bold enough to move forward with this call to action, my experience tells me about 50% of you will get a reconciliation completed in the last 45 days. If you get one and do not know how to review it, contact me for a free, no-obligation checklist that will guide you through a high-level review. If you do not get a reconciliation, and, in fact, get a blank stare from your accounting person, contact a financial professional to complete a review of your cash procedures and process. You may have plenty of cash flow today – however, that can change quickly if you do not appropriately manage it. Don’t risk finding yourself in a position where you cannot meet your basic financial obligations. “Cash is king” is a cliché’ for a reason – it is a requirement to run almost any type of business.

 

Mindy Barker & Associates works with entrepreneurial business owners to empower them with the tools and financial information to improve company value, profitability, and cash flow. To find out more on how you can be empowered, contact them today at cfo@mindybarkerassociates.com, or call 904.728.2920.

 

Why is Preparing a Budget Without a Balance Sheet and Cash Flow Like Driving a Car in a New City with an Old GPS?

Cars built in the early 2000s that had a built-n GPS required periodic updates using a CD with new roads and street addresses. If you are still driving around with a GPS of that era, you already know that when you get to a new construction area, the GPS will confuse you more than help you get to your destination. This analogy is similar to preparing an annual income statement for a budget without updated information. iStock_000019083488_LargeThe annual income statement will show the projected revenue and expenses – but will leave out critical pieces of information vital to the day-to-day planning of a business. Here’s an example of what I mean: revenue is highly seasonal but expenses are spread throughout the year, causing issues with covering expenses month to month. Actual cash flow and the ability to cover debt service payments are not analyzed solely with an income statement. Another example: internally developed software can cost a lot of money; the cash required for the development is maintained on the Balance Sheet and not the Income Statement.

Lack of proper planning and analysis, and failure to prepare a projected-by-month Income Statement, Balance Sheet and Cash Flow can lead to an unplanned cash crisis. Please contact Mindy Barker & Associates if you would like to have your budget process reviewed to determine how you can avoid such crises each month.