Budgeting: Are You Doing It?

Whether in your business or personal life, I’m assuming you have all thought about creating a budget at one point. Many people set limits on how much money they will spend each month on eating out, entertainment, etc. Businesses are doing a lot of this too. A friend of mine recently shared with me that one of his clients reduced their meals and entertainment (M&E) expenses by over $1 million dollars in 2009. By cutting out unnecessary M&E they were able to keep most of their staff in place, putting themselves in a great position when the economy recovers.

Budgets can seem intimidating because they can take a few hours or weeks (depending on the size of your company) to prepare. Budgets can also create limits on what you spend in specific categories, which a lot of business owners may not like. But budgets are not just about estimating your expenses, it is also about projecting revenue. Revenue goals should drive daily, weekly, monthly, and quarterly tactical plans.

There are various types of budgets. One type is a Zero Based Budget where you start from scratch. Some people think that Zero Based Budgets are a waste of time. But the beauty of this type of budgeting is that you are forced to take a new look at your business. Instead of estimating what percentage of revenue you are going to earn based on last year or the past few years trended data, you can consider what is currently taking place in your industry and create more accurate projections. You can then estimate your expenses based upon your revenue numbers or vice versa thereby combining the Zero Based Budget format with the top down or bottom up approaches. You can always revise the expected expenses based on your revenue projections.

Other budget types include the Top Down or Bottom Up budgets. The Top Down starts with creating your revenue estimates. From there the expense items are estimated using a percentage of revenue either based on past trends or new estimates. For example, in the past maybe your M&E were 15 percent of revenue, using a Top Down approach your sales figures will dictate what your M&E should be. With the Bottom Down approach you start with estimating your expenses based on trends from past years. Using this approach, your sales would need to be enough to support your estimated expenses. The challenge is creating a realistic budget where you can actually achieve revenues necessary to cover the expenses that drive your business.

Budgets can be a valuable tool to help you manage your expenses as well as create goals to achieve your revenue targets.

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