NOTE: I write this post in 2014, so be aware of its age. The content is still useful.
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In an ideal world, small business owners would review financials statements and budgets on an ongoing basis.
In the real world, the day-to-day struggle of running a business, paying bills and keeping customers happy causes the financial side of things to get pushed aside.
I’m not too proud to admit that I often fall behind on keeping my own practice’s books up to date.
It’s hard.
But it needs done.
December and January are good times to review the old year’s financials and plan for the new year.
Review of the Old Year
All businesses need an income statement (sometimes called a profit-and-loss statement). An income statement shows how much money you brought in and how much money you spent.
Your profit margin is an important thing to look at on the income statement, as is simply a general review of where your money is being spent. You might find areas where you’re wasting money.
Most businesses will want to create a balance sheet, too. A balance sheet lists your assets (cash in the bank, accounts receivable, equipment) and your liabilities (accounts payable, debt that your business owes).
Keys to look at on a balance sheet include your debts in relation to your assets, as well as how many uncollected receivables you have.
Planning for the New Year
Creating a budget is hard.
Let me rephrase that: creating a budget is not hard, but creating a budget that’s actually useful is hard.
Ideally, a budget will paint as accurate of a picture as possible of your income and expenses for the year. This helps manage cash flow and is useful in planning for big expenses.
The biggest mistakes I see on budgeting are:
- Just taking last year’s totals and increasing by a certain percentage across the board and calling it good, and
- Creating monthly budgets where you just take the estimated totals for the year and divide by 12. If you’re going to do a month-by-month budget (which you should, so you can better manage cash flow), do it based on your knowledge of what your income and expenses are likely to really be for that month, rather than just taking 1/12th of the full-year totals. Otherwise you’ll get skewed numbers in certain months.
And of course, you should involve your accountant in these tasks.
You do have an accountant … right?
[…] Jason Dinesen, Small Business Planning: Got Your Financial Statements and Budget Done Yet? […]
Jason, I can attest to your statement that creating a useful budget is hard, but by diligently monitoring the results each month, it can pay off immensely.
I finished a 3 year term as board treasurer for a non-profit organization, and one of my first actions as Treasurer was to take the annual budget that another board member had prepared prior to me joining the board (who made both of the budgeting mistakes you indicated), and spent countless hours tweaking it into something that was more meaningful and useful. Result, for two years in a row, our agency met our budgeted expenses within half of 1 percent. For our third year, we had a huge bump in unexpected revenue, which led to a huge bump in expenses, thus we had to revamp our budget before the year led out to facilitate this change.
Long story short, too many budgets are prepared as a compliance exercise and not as a financial planning and management tool.
You are so right about budgets being prepared as a compliance exercise instead of a management tool.
And your point about revamping the budget is a good one too. Budgets are living documents that should be tweaked as the year goes on and circumstances change.