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Can You Really Afford Not to Understand Your Budget?

Can You Really Afford Not to Understand Your Budget? 
Get Off the Financial Treadmill with a Budget and Move Forward 

Mindy Barker | Barker Associates

Last week, we kicked off our series on increasing our financial knowledge and the tools needed to educate ourselves in observance of Financial Literacy Month. This week, we are starting with one of the basics – the process and tool without which a business could easily crumble. We’re talking about the importance not only of developing a budget, but developing your thorough understanding of the numbers behind it. At its most fundamental basis, understanding finance is, in fact, about mastering the business’s budget. Without it, there is no control over spending. And without control over spending, it is difficult (if not impossible) to plan for the future. And without a plan, how can a business reach its objectives or achieve its goals? Simply, it can’t. 

There is only so far an incredible idea, enthusiasm, and optimism can take you in business. Without a carefully prepared budget, based on accurate information, you could be out of business before you begin, whether you are the owner of a small start-up or the finance manager of a large corporation. Absent clear direction, potholes surface all around you – revenue, expenditures, cash flow, strategic goals. A well-planned budget can pave the road for a smooth ride to financial longevity and success. 

Numbers are Black and White; No Smoke and Mirrors Needed 

Have you ever been in a financial meeting with someone who is at best unprepared and at worst clueless as to what the meeting is about? I have, and it is frustrating, to say the least. This is never more apparent than when someone is attempting a smoke and mirrors show, trying to distract you from their lack of knowledge. And, all you really want to ask is, “What do the numbers say? They’re black and white! There’s no need for all the gray.”  

The issue often boils down to them either not having a budget at all, or having one with no understanding of how it came together or functions. It’s not a matter of a specific document. It’s a matter of understanding the implications of the numbers represented on that document. Absent that understanding, the person cannot communicate expectations and goals, set organizational objectives, assess or measure performance against those goals, gain insights, or allocate resources appropriately or strategically.  

So, How Exactly Can a Budget Help? 

Most people understand the essence of a budget – it is a financial plan that estimates revenue and expenses over a specified period of time, including cash flow, revenue, and expenses. But they do not understand where the numbers come from or the true benefits of understanding them.  The ability of a business owner or manager to quickly identify available capital and expenditures, and anticipate future revenue is crucial to ensuring that resources are there when needed.  

With a budget, a business can control its finances, ensure it can fund its current commitments, all well as future projects, and enable it to meet its objectives with decisions based on facts, not assumptions. Armed with this information, the owner or manager can concentrate on cash flow, reduce expenditures, and increase profits. It also allows him or her to speak to the organization’s accountant, key stakeholders, or potential investors confidently and accurately about the business’s overall financial health.

There are numerous benefits of budgeting. For example, budgets: 

  • Provide revenue and expenditure estimates. 
  • Restrict spending. 
  • Highlight the strengths and weaknesses of the business. 
  • Help set realistic expectations when planning out future years. 
  • Minimize budget to actual variances. 
  • Ensure money is allocated to appropriately support strategic objectives. 
  • Ensure that the team involved in preparing them can effectively communicate with finance and accounting professionals, key stakeholders, and investors. 
  • Help share the business’s vision with other team members. 
  • Provide a tool to measure performance, comparing it to prior time periods and anticipating future ones. 
  • Help ensure that a team has the resources needed to achieve its goals.  

Running a business without a budget is like running on a treadmill – you are always working, but not going anywhere. If that feels like you, it’s time to hop off what keeps you moving, yet remaining in one place, and actually start moving forward. Remember, the budget process should be well planned out, informed, and include all of the responsible parties. It’s not just about improving your financial knowledge of the present, but about strengthening that knowledge to predict a brighter future. If you would like to discuss your budget and how to ensure it is working efficiently for you, or if you have other specific areas of concern, please click here to schedule a 30-minute free consultation.

Businesses are Using Decades Old Processes and Expecting 21st Century Results!

Organizations both large and small can get frustrated with the timeliness and quality of the information they receive from financial systems. Often, snap decisions are made to purchase a new system to solve the problem. Many times old processes are transferred into the new system. The new system then doesn’t work the way it was envisioned, costing the organization time and money. All of this could have been avoided with proper planning.

 

As a Financial Strategist,  I am often brought into organizations to review their systems and conduct due diligence for the purchase of a new one. In many instances, my evaluation has resulted in recommendations for improvements and enhancements for the existing system. By addressing process improvements, I have helped organizations avoid a new system purchase and provided immediate relief to pain points of information accessibility.

 

A bad process forced into a new system can result in potential disasters, such as delayed reporting and non-compliance.  For example, I assisted an organization that was being fined for noncompliance in sales tax reporting.  This company had recently implemented a new system, but the financial staff could not obtain accurate information for reporting because of incorrect data entry.  Meanwhile, the fines and penalties for not reporting were adding up as the staff attempted to create the required information in an Excel spreadsheet.

 

Had this company conducted a thorough review of their current system and processes, even engaging the software vendor to learn if there was more they could be doing with their system, some of the delays and fines could have been avoided.

 

Mindy’s Tip:  Review your current process or have a professional do it and make sure you actually need a new system before you make the decision to purchase.  If you decide to purchase a new system, make sure you roll out the improved version with a strategic plan, so you do not interrupt the flow of your business.

 

Mindy Barker, Founder & CPA
(904) 394-2913 or (904) 728-2920
cfo@mindybarkerassociates.com

Cost Center Owner – If You Don’t Own the Budget for Your Department – You Should!

As a cost center owner, have you found yourself being asked to approve expenses, but you have no clue where they came from? You know you have a budget, but do you truly understand how it was developed or how you are supposed to work with it on a daily, monthly, quarterly and annual basis?

In the course of the budgeting process, an isolated group often prepares budgets in a vacuum, failing to include the right people in the process. accounting-57284This leads to confusion and frustration when the budget-to-actual expense is compared each month. I have often experienced meetings where budget-to-actual variances are discussed and the manager approving the actual expense (a) has no idea how the budget was prepared and (b) cannot answer any questions about the budget-to-actual variance for the month. This leads to the Board, President and Senior Leaders reviewing and approving a budget based on inaccurate information. They may have unrealistic expectations when planning for the next year as the expenses budgeted in each cost center is inaccurate. Make sure your budget process is well planned out and includes all the responsible parties.

Please contact me if you would like to have your budget process reviewed to learn how to include all of the right contributors, avoid setting unrealistic expectations and finding surprise variances each month.

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.