59: Building Your Business Budget

In this episode, I guide you through the essentials of creating a budget for your business as we enter planning season. From understanding the importance of revenue forecasting to setting up expense guardrails, I provide valuable tips on navigating the budgeting process. I explain why budgeting is critical, how to approach it, and the impact it can have on your overall strategic planning. Plus, exciting news about the merger of my podcast and accounting firm under the same motivating name, Accounting with Confidence.

Link to our new website: https://www.accountingwithconfidence.com/

Chapters

• 0:00 Introduction to Beth Whitworth and Welcome
• 0:53 The Importance of Budgeting
• 2:26 Creating a Revenue Budget
• 6:13 Managing Expenses and Guardrails
• 10:48 Final Thoughts on Budgeting
• 18:42 Encouragement and Conclusion
• 20:23 Exciting Announcement
• 21:46 Closing Remarks

Transcript

 I am Beth Whitworth race car driving quilt making CPA firm owning wife, mom, and boss. I'm here to help you build a business you love by sharing all of the good, the bad, the ugly, and the excellent sides of working in this industry. It's not always easy, but after many years, I can finally say it's worth it.

Let me guide you on your journey to accounting with confidence.

Hi everybody, and welcome to another episode of Accounting with Confidence. I. Outright gonna just apologize. I've been recovering from kinda an upper respiratory issue for the last couple weeks, but I had some time scheduled today to work on some podcast recordings, so I thought I'd go ahead and bring you another episode.

Now this one I'm gonna consider a confidence booster, and I'm going to keep it pretty short, but it's something that right now, in the season we're in, which is, we're kind of in mid-November, right now it's planning season. So in my last episode, I talked all about going to the strategic planning summit, um, that I do with the Woodard organization, and it was all about.

Planning strategically for your business for the coming year and into the future. But what I feel is something that is the starting point for people who don't tend to do a whole lot of planning with their business is the budget process. So today I'm going to talk about a little bit about why you should be doing a budget, a little bit about how you can do the budget.

And then also where that falls in the spectrum of doing planning for your organization. So first off, why do people do a budget and why is it important as a business owner to do that? And I would say the reason is. It's the beginning of a plan. It is setting some guardrails on how you want to spend your money in the new year.

It's also makes you strategically think about how you are going to generate the revenues in order to support. Your company. So the basic level of a budget is to go through and do a budget on your profit and loss. So on your revenues, you're going to come up with a monthly amount, which totals up to an annual amount and, and some people can just say, I want a total for the year, an annual amount, and divided by 12.

But if you're seasonal, that is not something that I necessarily recommend, especially from a budgeting standpoint. Unless you are fairly low volume of transactions, I would say you wanna get a little more precise. But the starting point is what's your total revenues gonna be divided by 12, and that's what it's going to be per month, the revenue budget that you're shooting for.

Now, let me be clear. A revenue budget is not really a. Budget. It's a forecast. You have to take some time to say, okay, how much revenue do we need? How much revenue, you know, to cover overhead, to pay your people to afford to make your product or provide your service. There's a minimum level. There's that break even amount of revenue that you need to have to keep the doors open, but.

More importantly for a business, you need to be budgeting, forecasting on your revenue side for an increase. If that's a goal, and I would say that 99.999% of the time, you should be budgeting to have an increase in revenue year over year. Because expenses are not staying the same expenses. Even if you don't change anything, you don't give raises to your employees.

You don't change what software you're using, you don't change. There's no change to your lease this year, anything like that, just because those don't change, some of those other expenses do change. Insurance goes up, software subscriptions go up. The cost of supplies, your contractors may have an increase.

So those are things that are not in your control. You know, a price increase from a vendor is something you have to consider and say, okay, do, do I wanna stay with this vendor? Do I wanna shop it? There's a cost to switching vendors at, at some level, whether it's the cost of time or it's the cost of just.

The implementation could cost. So there's, uh, lots of things to consider, which is why I say every year you should be budgeting and slash forecasting your revenues to have an increase. Now, I could do a whole episode on what goes behind the scenes on figuring out what that revenue number should be, because it has to do with what your programs are inside of your business.

Do you. Have a standard, you know, 2% price increase on are you contract based? Are you, can you provide a new service? Can you get more customers? There's a lot of pieces that go into making up what supports the number you want for revenue. But if you were to just be starting and you don't want to take that time to delve that deep into the details, I would say take what you expect this year's revenues to be and add a percent, whether that's, you think you can grow revenues by 2%, 10%, 20%.

It really, that is very dependent on your goals for your business and your expenses. So the next part of the budget is what I call the guardrails, and those are the guardrails for your expenses. Now, it doesn't mean that you cannot spend more than what you are predicting for an expense in your budget, but.

It gives you this system that you thought about to say, okay, how much am I going to spend? And then when you go over, that might create a variance and you can explain it. Why did I go, why? Why did I go over? Well, my laptop crashed and I had to buy a new one. Maybe it's something along the lines of you had an opportunity to go to a conference and you didn't budget for that in your education line, but it became something that was very important.

To you at the time and you consciously made a choice to go over the budget. So things like that, that are thought out or unexpected, things that, that you need or want to do inside your business. If you don't think of them, them at the time that you are doing your budget, it's okay. But just know that you're not gonna go back and change your budget once the year has started.

You're just gonna show those things as variances. So for me, I start with a. Profit and loss statement I dump about, you know, two or three years out of, and that will show me my revenues each year. It will show me my total expenses each year. And I also show it as a percent of your revenue so that you can say, okay, look, my merchant fees for paying for my credit card processor have averaged, you know.

2.2% over the last three years. That's how much I'm gonna budget for that this year. So it takes some time. It depends on how, I guess, how complex your chart of accounts is and what level of detail you are keeping inside of your accounting software. And so whenever we work with people who are, you know, they really, really like to have lots of subaccounts and subaccounts of Subaccounts, we discourage that because it makes it.

Difficult to come up with an overall budget when you're budgeting advertising and you're budgeting by Google Ads versus Facebook ads versus Instagram, whatever. I mean, all of those things, if you're keeping those as sub-accounts, really what you need is just an overall advertising budget. You don't need all of that detail inside of your budget.

Now, of course there is my rule of thumb that if you're putting a customer name, a vendor name or an employee name in the name of a chart of accounts, you're not doing it right. Chart of accounts should be fairly vague, and then digging into that account is where you find the details. So part of the exercise of building this budget is to go see where you spent the money.

Pull up your reports or work with your accountant to say, okay, let's look at the the biggest expenses we have. Typically, that's going to be salaries. Wages and taxes. Usually it's occupancy expenses, utilities, and rent. And then of course there's, as far as overhead stuff, insurance is another big one. And so I like to take those big categories, you know, maybe things that are more than three to 5% of revenue and see what's in there.

One to make sure you understand what is being posted there. Two, to look for an opportunity to decrease those things. Maybe it's time to shop insurance and three, to figure out, okay, is this an expense that I need to. Increase a budget for the coming year, and mainly for me, those would be things, pay increases.

So, you know, you need to get your employees paid and you, you know, especially in our current climate of rising costs, it's important to budget for those things. And decide when you're going to give those increases. Is it gonna be January one, or is it going to coincide with the end of a busy season that you might have?

Or is it going to be, you're gonna stagger them and say, okay, I'm gonna, I have more than one employee and I'm gonna stagger that so that you, you're not taking the cash flow hit all at once, but those are the things you really need to be focusing on. The other thing with a budget, once you've established what you think your projected forecasted revenues will be and what you want your expenses to be, it needs to come out to a zero or a profit.

And I will say if you're in business, that's taxable business. And for profit, you really need to be making a profit. 'cause if you are. Budgeting at zero. I don't think that's probably your end goal, but definitely don't budget to spend more than you're bringing in in the upcoming year. If you're budgeting for a loss, you are putting yourself in a position that you are going to have to take out some debt or you are going to have to put your own cash into the business.

You are somehow going to have to subsidize those things. And budgeting for a loss. If you already have any type of debt service, you, maybe you have a loan payment to for a vehicle, maybe you have a loan from the bank. A lot of people still have like the EIDL loans that we got during the pandemic on our books and what the profit and loss statement does not take into account for the budgeted.

Expenses is the actual principal amount that gets applied to those loans. We are only budgeting for the interest because that's what you track on your profit and loss. So if you're budgeting at a loss just for the expense portion, then you don't have enough cash to pay for the principal side of it. So at a minimum, you need to be having a budget that can cover the principle as well for all of the debt service that you might have.

The other thing you want that profit for is so that you can pay yourself. You can pay yourself more if you're, you know, you're on salary, but you're keeping it kind of mos modest because you know, unless there's a profit, you really don't wanna pay yourself more, then you need to budget for a profit. And then the third thing is you wanna budget.

So there's a profit to leave some cash in the business for growth. You know, you decide that you want to put in place, you know, a big new marketing plan or something to that effect where you need to have. Some extra cash because you know of a big expense coming up. You need to budget to have a profit.

And I will say that, you know, some people shy away from showing a profit 'cause oh my gosh, I'm gonna owe tax. Well, there's lots of things that we can do to minimize the taxes by handling things through retirement account or you know, there's non-cash items like depreciation, but I. Honestly say you have got to budget for a profit.

So I think that is a big takeaway here, is that if you are going to do a budget, which will go back to why I, where kind of where that fits in the grand scheme of strategic planning is I feel that a budget is the minimum. Viable piece of planning that you should do. Meaning if you don't have time to go through and set long-term goals for next year, things that might take a year.

Aspirations, you might have all of those things I talked about working through when I was at Summit. At a minimum, you need to look at your business long enough to set up the financial. Budget because if you go, don't do it. You don't know if you're expecting a profit or not. You know, at the basic level, and you should be budgeting.

For a profit. That is one of the things that I feel that budgeting is as tedious as some people think it is. It is absolutely something that can make you think very clearly about your business. Maybe it's not digging into all of your vision, your mission, your purpose, and my supporting all of these things.

If you haven't done that work. Just start by doing a budget. A budget's gonna force you to think about where your revenue's coming from. How are you going to get to that number this year? And it also is going to force you to look at how you're spending your money. And I feel like that is the the minimum level that you should be working through every year.

So budgets are not something that everybody says, Ooh, yay, I get to do a budget. Some people love 'em. I'm sure there's takes all kinds, but I do think it is a very important tool. So I would love to see all of my business clients and anybody who owns a business, big or small, sit down and essentially do a, that minimum viable.

Budget, you know, essentially something that at a, it, it's at least going to budget to break even. It is not going to budget to break, make a loss. If you have debt service, it's going to budget to be able to afford to make your payments on your loans and something that is not dependent on. You contributing more money or taking out more debt, that is where I would encourage everybody to look.

Now there are lots of other details that can go into the budgeting process, including, you know, kind of budgeting for the cash flows of how you're managing, managing your debt service, especially if you're in a situation where you would like to pay down that debt faster. But really these guardrails that we're putting in place for the expenses, it's up to you to manage that or make sure that the people on your team understand that it's critical that they stay in the guardrails and that there's some sort of process if for.

Determining an expense that you want to make, even though it is outside of the budget. So there's all kinds of ways to set up reports that you can compare versus your budget. There are lots of reports that you can generate to dump into Excel to start the process of creating your budget. And I tell you, this is something, I haven't done it yet.

For my 2026, I was kind of waiting to see what came out of summit this year so that I knew what things I was going to be planning for and would need to include in my budget. Now, if you get to those expenses, and you know, so you start with a revenue saying, okay, this is how much I think I can do next year, that I wanna do next year with this percentage increase.

Or based on, you know, you have certain amount of contracts that are coming in, whatever those things are. If after you put in all your wishlist of expenses and it's a loss, you don't necessarily have to go back and say, okay, I gotta cut something out of my expenses. You can go back to that revenue number and say, okay, where else could I get some money?

Where else could I increase these revenues to support the expenses that I want? If you think you're already maxed there, then yes, you need to go back to your expenses. So it's not a complicated process, but it is something that is really important. I would say if you're going to work through a budget, I would say find some time that's uninterrupted.

Start pulling through the numbers and if you have to, you know, include some, any key personnel that might also be part of your numbers. If. You need help with that. Work with your accountant. You know, my, my clients, you know, we help them with budgets all the time. Starting with, Hey, this is how you, where you need to start.

You need to start with where you think this year's going to end and go from there as far as what expenses do you have. So I really encourage you to take these last few weeks of the year and put together a budget and. Give yourself that time to really think about what you want to happen just from a, a cash perspective, a, a revenue minus expenses perspective next year.

Like I said, that that will open up your mind to a lot of things, but it will also set you up to be critically thinking about your business and how you can do things to make changes there. So, okay, that's soapbox topic. Maybe, maybe not, but I would say for sure it is something that I believe in. I don't see clients and every, you know, all business owners doing this, doing a budget.

And even if you're not the one who's in charge of the numbers, if you've got somebody on your team that can. Put together a budget because they're in the accounting department. Do it. Lean on them and then look at it and see if you agree. So for now, I would say, you know, by the middle of December, you know, before we really get into the holidays, at the end of the month, I.

Get, get something on paper, even if it stays in Excel and never makes it to your accounting software. Although any accounting software has a place to drop a budget, it is worth the time to complete that exercise. Okay, that's all I have for now. It's a little bit longer than a confidence booster, but I'm still gonna call it a confidence booster.

And thanks for listening. And I am very excited to announce now that we have. Merged Accounting with Confidence as the podcast is actually now accounting with Confidence, the accounting firm. And so we have merged my podcast entity and the Accounting Solutions Group of St. Louis and. We're retaining accounting with confidence, so we are the same team, but I'm, I'm thinking we are the same team with a different attitude and accounting with confidence essentially has defined how we work in our firm.

We are empowering people to build businesses that they love. Lives that they love. And so that is where I said, okay, you know what? Accounting with confidence more clearly defines what we're doing. So I'm so excited it is happening this week. So everything is getting rebranded and I'm starting to put announcements out and using the new logo.

So I'm very excited about this. So. It won't change anything here on the podcast. It will still be accounting with confidence, the podcast. Um, but on the accounting firm side, it will be a big change. But I feel like it is representative of who we are. All right everybody. I hope you're out there building a business that you love and if there's any little piece of what I said today that can help you continue that journey to build a business you, you love, I'm so happy.

Alright, have a great week everybody, and I will talk to you next time.

Thanks for listening to another episode of Accounting with Confidence. My hope is that my experiences can help you navigate the realities of owning and operating your business. Please subscribe or follow the podcast on your favorite podcast listening platform so that you never miss an episode. Feel free to leave me a text by using the, send us a text message link in the show description and let me know how I'm doing.