If you know me, you may be aware of my deep love for some great food. Over the years, this passion of mine has led to ups and downs on the scale. To help balance my love for food with a healthy lifestyle, I made a New Year’s resolution a couple of years back to meet with a trainer and talk through a plan. Upon our discussion, I quickly realized that the similarity between a weight loss plan and creating and maintaining a budget for your business is striking.
Here are several commonalities that can help you develop and follow an effective budget (and maybe even help you stick to a health routine too!)
1. Budgets, like weight loss, start with a plan. If you don’t have a clear picture of where you want to go with consistent monitoring and the ability to adjust along the way, you don’t have a budget. You have a wish. My trainer met with me and discussed my current situation, challenges I’ve faced in the past or might face over the next year, what my big picture goals were and how I would quantify success. The same is true with a budget. The first goal of any budget is to be realistic and look at what has happened in the past. When budgeting, I review the last two to three years and break down revenue and expenses by month. That exercise allows me to see patterns as to what has worked or not worked. Some example findings from this exercise might be: Why is October always profitable or why do we tend to have a slow revenue month every January? When finished, you will see things that will help you create your next budget. It will tell you where your hard-earned money is going, how to cut costs and place your dollars where they will have the most impact.
2. What is your predicted revenue or cash you bring in the door? In the first conversation with my trainer, they asked the big question. What is your goal? To be honest, at the time I wasn’t sure. I just knew I wanted to lose some weight and make healthier choices. Same with predicting budgeted revenue. The goal is to be realistic, don’t overestimate revenue just because it sounds good. Why do you think most gyms see a huge drop-off in clients once the New Year’s resolution fades away? Same with budgets. Make doable changes when you plan out your one-year budget that keeps you motivated to stay on track. Using your historical data, create a realistic prediction of what revenue will be, by month, for the year. It’s completely normal if your plan isn’t perfect from the start. We will talk about tracking and adjustments later.
3. What are your fixed costs? One of the questions my trainer brought up was “What are the things, no matter what, that will get in the way of achieving your goal?” My wife bakes cookies every Sunday. Her cookies are a consistent item that calls my name. In business, those are the fixed costs that happen every month and are consistently the same. Think things like rent, insurance, utilities, accounting, leases, etc. Same amounts, month in and month out.
4. What are your variable costs? For me, as I got into a groove at the gym, I started purchasing a supplement. The more I worked out, the more I used the supplement. In business, the equivalent to this is items that vary by month according to production or sales volume and are often referred to as “cost of goods sold” i.e., anything related to the production or purchase of the product your business sells. One question I often hear is “Are salaries or payroll fixed or variable costs”? The general answer is that anything related to the production of a good – is treated as a variable expense, while office or in-house staff are usually associated with fixed expenses.
5. What are your one-time costs? One-time costs for a budget might include a large capital purchase like a new industrial oven for a restaurant, a new piece of machinery for a production facility, software, etc. For me and my health plan, a one-time cost can be viewed as Thanksgiving. The time when I stop counting calories for one day and indulge. It’s important to plan for these types of items so you have a line of sight on how they affect your numbers.
6. What is your profit? Toward the end of my first meeting with my trainer they said, “Knowing your goals, your challenge of walking by your wife’s cookies along with your love of Thanksgiving IF you consistently follow the plan listed above, the net result will lead to a healthier lifestyle and weight loss.” In other words, if your revenue exceeds our expenses, we will have a profit. Growing profits mean a growing business. If profits are low, the culprit could be that our prices or revenue are too low. It also could mean that our fixed expenses are too high or more likely, our variable costs (aka “cost of goods sold”), are contributing to our lack of profit. Maybe, we are overstaffed at the restaurant or on the plant floor based on the revenue being earned.
7. Monitoring. I have had the privilege to work with companies of all sizes from different industries. If I know one thing, it’s that most successful companies create and monitor their budgets without fail and compare budgets to their actual numbers. My success at the gym came from tracking my calories daily and meeting with my trainer each week to gauge my success and by making small adjustments along the way. If your budget goes in a file drawer after its created, it will be as beneficial as a glazed donut to your diet.
8. Accountability. I’ll never forget the first day I walked into the gym. I didn’t want to go in. I didn’t want to be held accountable, but I knew I had to expose myself to something I didn’t have a lot of experience with and deal with things that were a struggle. In the end, I gained confidence, identified and dealt with roadblocks, and experienced success through tracking things one day at a time. It’s the same with a budget. Budgeting helps you see exactly where you stand, it tells you if you are spending money the way you think you are and gives you invaluable insight to improve your company’s performance.
Budgeting and weight loss may appear vastly different on paper, but I was astounded to learn how similar they truly are after going through my health journey. It’s important to note that there isn’t a perfect one-size-fits-all to a budget plan, just like in weight loss. Developing a budget that aligns with your business needs will take time and revisions, but by following the above tips you can feel empowered to plan, monitor and adjust your budget to achieve your financial goals.
At BerganKDV, our business advisors partner with clients to assist with numerous business challenges including budgeting. Want to learn more about what our team can do for you? Let’s talk!