It's That Time Again…Budget Time for 2014

The fourth quarter of the year is usually the time when budget & plans get finalized for the following year. Setting a plan for the year is extremely important.

Budgets and plans are important for executive management to set goals. It is also important for employees to know the goals and work as a team to achieve.

Here are a few tips for setting a budget and/or plan:

REVENUE
1 – Use foreseeable/signed revenue. Businesses with signed contracts into the next year should use this as the main basis for the revenue plan.
2 – Know the sales cycle & be realistic. Make sure that, when budgeting for new revenue, the timeframe and amounts are realistic. For example, a company planning on receiving government contracts should probably not plan for new revenue in January if the contract process is not too far along.
3 – Be cognizant of receivable cycles. If the accrual based budget leads to a cash flow forecast, make sure the timing of when funds are received accurately reflects the customer payment terms. For example, the expected accrual revenue generated in January may need to be assumed collected in March or April (especially if your customers are large organizations).

EXPENSES
1 – Use zero based budgeting. Many times, budgets are created using last year’s expense figures. This is usually not ideal. It is far better to start from scratch and focus vendor by vendor on setting a plan.
2 – Require lots of detail. The old adage: “the devil is in the detail” is true when budgeting. Make sure that the expenses are well thought out and lots of detail for each expense line item is documented.
3 – Create cost centers. Organize budgets based on cost centers and assign one employee for each center.
4 – Create “ownership” of budgets. Make people responsible for creating, tracking and authorizing the spending in their budget line item.
5 - Realistic & Agreed. Make sure that the final budgeted expenses are realistic and agreed upon by all parties before implementing.
6 – Incent employees to achieve (or beat) budget. Give financial rewards for employees who come in under budget.
7 – Report/Reward Regularly. After the budget has been approved, and 2011 is underway, make sure that the monthly results are regularly delivered to the team. Also reward the employees regularly during the year for favorable budgets.
8 – Allow for Change. Sometimes, events happen at an organization that makes the existing budget not achievable. For example, the company may bring on a extremely large project but also involve a lot more costs. Make sure that the plan is revised for the year and that the budget owner is responsible for the updated plan.
9 – Remember taxes. If a C-Corp, remember to include income taxes into your budget for March. Corporate tax payments are due by March 15th. If your company is profitable, this could be a large amount that will need to be factored into cash planning.
10 – Use financial metrics. Once finished, look to industry standards for budget reasonableness. If gross or net margin percentages look unusually high, they probably are too thigh - they probably reflect a cost that has not been accurately figured into the budget.

SMALL BUSINESS FINANCE TIPS: Maintaining Your P&L During a Down Economy

For any small business, managing revenues, costs and expenses comes with inherent challenges - especially in a down economy. For example, maintaining healthy profit margins – in the face of rising materials and labor costs – can be daunting, but is necessary for a small business to thrive and survive in today's economy.

I have developed the following tips to help small businesses best maintain their P&Ls that I hope you all find helpful:

Revenue:

- Create revenue plan & hold employees accountable for the plan
- Lock down clients with long term contracts if possible – to help revenue become predictable
- Plan to continually grow revenue (this will guard against client drop off)
- “Love” your existing clients/customers keep them happy, send thank you cards, buy them an occasional thank you present
- Grow revenue with existing clients/customers (these are your best opportunity)
- Get rid of undesirable clients (this will not help you in the long run)
- Use a sales tracking software/tool to help you find keep focused on new client opportunities
- Have action plan for growth & action plan for downturn and be ready to use (do not be caught off guard)

Expenses:

- Revisit P&L results on a monthly basis
- Ensure the expenses can easily be identified (i.e. make sure that there is not one vague line item where all expenses are booked)
- Continually compare results against income and expense benchmarks

For a professional services firm for example:
- The net margin of no less than 20% of revenue (note: ensure that the owner/officer salary is included as an expense before looking at the net margins)
- Employee costs should be about 50% of revenue; look at revenue per head as another metric – revenue per head should be no less than $150K; Greater than $200K per employee is preferable
- Rent should be no more than 3-6% range of company revenue
- Spend money (5-10% of revenue) on business development
- Incentivize appropriate employees around expense goals to ensure the company stays “lean”
- Ensure that the company is profitable and keeps a healthy margin (this will guard against down times)
- Keep and maintain projections which would include actual results PLUS forward looking projections for the year
- Include spending on assets/depreciation (a non-P&L item) in the monthly review…this is an area where spending can get out of hand and often gets overlooked
- Do a vendor analysis on an annual basis (keep good relations with your vendors but make sure that an expense is not widely out of whack)

I welcome all thoughts comments and feedback!

WHY OUTSOURCING YOUR FINANCE DEPARTMENT MAKES SMART BUSINESS SENSE

For many smaller and mid-size companies, the hiring CFO-level talent can be too costly and completely unfeasible. In addition to searching for the right candidate, you have to offer a highly competitive package – even in today’s economy – to attract the top-level finance talent you need for business success.

In addition to requiring C-level finance talent, smaller- and medium-sized businesses require a dedicated finance department that can handle the entire spectrum of financial support services – from strategic financial business planning to day-to-day accounting.

So, the challenge is posed for any entrepreneur…how can I have a viable finance team without the dedicated resources for hiring talent?

A more cost-effective and sound business approach is to outsource your complete financial needs. Here are the reasons why this makes complete business sense:

• You Can Get Senior, CFO-Level Support for Strategic Financial Guidance


• All Accounting Can Be Taken Care of Seamlessly


• Outsourced Partners Can Provide an End-to-End Solution


• Outsourced Partners Often Provide On-Site Support (i.e., Can Work in Your Office a Couple Days a Week)

So, rather than making the investment in internal finance talent, outsourcing to the right partner can help bring your business to the next level. Much like many companies outsource marketing and advertising support, why shouldn’t a company make a similar – and more cost-effective – investment into the right finance team?