Budget Your Business

Finance Expert: Working with the Accountant to Start a Successful Budgeting Process with Phyllis Barnett

• Scott Geller • Season 1 • Episode 25

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Unlock the secrets of strategic financial planning as I, Scott Geller, team up with Phyllis Barnett from Neo Consulting to navigate the intricate world of budgeting for small businesses. Phyllis, leveraging her wealth of experience as a fractional controller, emphasizes the pivotal role of setting future financial objectives while meticulously reviewing past data to ensure your financial inputs are anything but "garbage in, garbage out."

We unravel the art of optimizing your business's financial structure, diving deep into the nuances of organizing a chart of accounts for clarity and comparability. Learn how striking the perfect balance in account groupings can lead to more insightful financial reporting and performance analysis. Phyllis shares her valuable insights on dissecting costs to enhance understanding of profit margins, which is crucial for maintaining a healthy financial track record and making informed decisions.

Phyllis spotlights using QuickBooks flexibility and budget features that cater to evolving business needs. Discover how QuickBooks allows businesses to manage multiple budgets, adapt to changing conditions, and distinguish between budgets and forecasts. We'll highlight the importance of both annual budgeting and periodic forecasting as essential components of effective financial management.

Podcast Recommendation: Revolutions by Mike Duncan

Find out more about Phyllis Barnett: phyllismbarnett@gmail.com

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Speaker 1:

That is one element of it, one side of it. Another way to think about those budgets is a budget can be almost like a plan or a roadmap. Let's put this plan into place. We will all agree on it.

Speaker 2:

Hello and welcome to Budget your Business, the podcast for small business owners who want to learn how to financially plan for every aspect of their business. I'm your host, Scott Geller. Today, I'm joined by Phyllis Barnett of Neo Consulting. Hello Phyllis, Hi Scott, Thanks for coming on.

Speaker 1:

Hey, thanks for having me.

Speaker 2:

So Phyllis and I have worked together a few times in the past andyllis as a controller, accounting and finance by trade and has done an excellent job coming in and really understanding the situation companies are in, helping them with their accounting, helping them kind of clean it up and really get them set up for success. And today we're really going to go down the path of how you engage that accounting function and how you prep for that budget. But before we get into that, Phyllis, for folks who are meeting you for the first time, could you share a little bit about who you are and what you do?

Speaker 1:

Sure, as Scott mentioned, we've worked together on some projects in the past. I have in the last recent years been working as a fractional controller, meaning that I perform those services on a part-time basis for multiple clients who may not need someone full-time or just may need help with a project. Before that, I've worked in financial accounting, I've worked as an auditor, I've done FP&A work, which is budgeting and forecasting, so I kind of had a gamut of the various financial and accounting functions over my career and many different industries. Thanks, phyllis.

Speaker 2:

So today again we're talking. This podcast is around budgeting for small business owners to be able to understand how they can improve their budgeting or budget for specific areas. But today I really want to just start with in your mind, phyllis, what is the purpose of budgeting.

Speaker 1:

So I tend to think of budgets as something that's a plan. Typically, smaller companies think about what do we want to accomplish this year? What are our goals? Companies think about what do we want to accomplish this year, what are our goals and how do we articulate those into a financial plan? Where do we want to spend our money? Where do we think our revenues are coming from? Where do we want to make our investments? So it's really more of a guide and a plan for your period, which is typically a year.

Speaker 2:

And in order to go down that path of putting that together, it can be a little daunting for those that aren't used to that process, but where would you suggest that they start?

Speaker 1:

That's a really good question. You can start in various ways. Companies often like to do some brainstorming and they sit down and think about what is it that we want to do this year, what do we want to accomplish? And it's goal setting, which is wonderful, but I also think looking at the past. Where did we come from? Where did we spend our money last year or the past couple of years? Where did our revenues come from? What kind of projects did we invest in? So they get an idea of where their history is, in order to have an idea of let's turn that into where are we going going forward.

Speaker 2:

Now, particularly when you mentioned what happened in the past, and you know a lot of these is kind of garbage in and garbage out what parameters or recommendations would you have about making sure that it's not garbage in?

Speaker 1:

That's really the crux of the issue. I think Excuse me the preparation for budgeting, particularly if you're going to use your budget as a measuring tool, is really the most important element here. If you're looking at your past history as we've talked about your past financials and your past results you want to look at the accounts. Are they the accounts that we want to use to measure our business? Are they the accounts that we need? Do we have too many? Do we have too few? Are things getting recorded, transactions getting recorded in the right places? So I think that's probably the first thing that you want to look at before you are actually ready to make your budget. If they're not, then you can make changes to those accounts.

Speaker 1:

Your chart of accounts, your accountant, can help you with that. We need more accounts. We need less accounts. We need to make sure things are in the right buckets. Doing that exercise is key in moving forward to all right. Now. Here's our framework for how we want to measure our business. When we're thinking forward, what are we going to do? What do we want to plan within that framework? So you've got some comparability between what it is that we want to do and what it is that our financial system and records are able to capture.

Speaker 2:

That can be a tough judgment call. That I've found is what is too many or too few accounts in the chart of accounts? Do you have any rule of thumb or any guidance that you would share about what could be too much or too little?

Speaker 1:

I tend to lean on the side of condensing chart of accounts. I've often found, throughout the many client engagements I've worked on, that there are numerous accounts but they're either not used or there's not consistency in where the transactions are recorded. I'll give you an example. Often business owners or even leaders of certain areas for example marketing or HR or IT will want to know how much should we spend in hotel travel, how much should we spend in meal travel, how much should we spend in auto rental?

Speaker 1:

And really, when it comes down to it, those breakdowns of accounts when they're looking at the analysis don't really factor into the big picture of how they're measuring their business. So instead of having multiple accounts maybe an account for travel, or condensing six accounts down to one or two so that's just an example, but I tend to lean towards fewer number of accounts that are meaningful, which also make it easier when the actual transactions are being recorded to your financial records. So that way again, I've mentioned a couple of times and you may hear it a few more times having that comparability of it's. In that travel account, we recorded the actual expense in that travel account and we budgeted to that travel account. We recorded the actual expense in that travel account and we budgeted to that travel account, so you don't have a mismatch of accounts.

Speaker 1:

I think each business is different and some businesses may need more marketing accounts. Some businesses may need more accounts that relate to their consulting or IT services. Some businesses may need more revenue accounts because they have different streams of revenue or different channels of revenue. So it's really a business by business type of decision and I think this is something really to work with your accountant or your controller or your consultant who is helping you with your chart of accounts and with that framework.

Speaker 2:

I love that approach. There's too many companies that I walk in and they have like a hundred accounts and they think, oh, look at how much I'm tracking. But then when you ask them, well, how many times you actually look at each individual account and is it really telling you anything? That's to me. I find like that that's usually where that approach falls apart.

Speaker 1:

Exactly. It's kind of a breakdown there. I tend to also think, scott, of groupings of accounts. So usually they're about seven groupings and I think of those as things like your rent and occupancy is one, your salaries and compensation as another, your professional fees and consulting expenses as another, your salaries and compensation as another, your professional fees and consulting expenses as another, your insurance and taxes as another, your telecom as one, and I don't know if I marketing sales. So generally say six or seven main groups and you can have some sub-accounts under those. But those main groups, I think, are often what business owners think about when they think about their business. How am I spending in those different areas, in those different groups?

Speaker 2:

Now, just to be clear for folks is that that would be for their operating expenses. You definitely want to split out your cost of goods sold and a different set of expenses, but you're specifically talking about the operating expenses, right?

Speaker 1:

Operating expenses. Exactly, yes. Your cost of goods sold is a whole other group of expenses and, of course, revenues. Some businesses like to break those revenues out and group them by different channels, or they may group them by geographic location or some other grouping that is meaningful to them.

Speaker 2:

And what do you see the importance of having that cost of goods sold, broken out and maybe clear? How does that help the budgeting process?

Speaker 1:

And yes, that's a leading question, but I'm going to throw it out there anyways line item so you can look at your margin, which is going to be your revenues less your cost of goods sold. What is my margin before I'm looking at all of my operating expenses, before I'm looking at things like travel and like professional fees and like salaries and so forth? So definitely when you're doing that budgeting business owners I see very folk typically are very focused on that anyway. They want to know what is the margin of my business before I have all my operating expenses.

Speaker 2:

Right and could you just talk to how that plays into the you mentioned comparability right being able to compare things and could you maybe talk to how that structure really helps being able to compare?

Speaker 1:

Are you referring to the structure of having the cost of goods sold in your margin structure?

Speaker 2:

Right, yes.

Speaker 1:

Yeah Well, often what I've seen. If you see something different, please, please, chime in there, scott, but often businesses want to be able to look at that margin from month to month. So if they're or quarter to quarter, whatever the period is if they're looking at what is my revenue stream and what are my cost of goods sold that I had to spend in order to get that revenue stream, that margin is usually a target that is again a comparable from month to month. The operating expenses are much more variable expenses and they can vary from month to month or quarter to quarter, depending upon a lot of different factors. So when businesses are trying to assess that comparability, they're typically looking at two different lines. They're looking at that margin again revenues less cost of goods sold and then they're looking at that margin again revenues less cost of goods sold and then they're looking at their bottom line after their operating expenses. So I think that gives them two different targets, if you will, or placeholders, to be able to work towards and measure against.

Speaker 2:

Yeah, I agree, phyllis. I like how you broke it out there. You know, pulling all this together can be daunting for a business owner, and in that, business owners like to be involved in it and absolutely in the planning and thinking about what it is that we want to budget.

Speaker 1:

What does our business look like, what are our plans Involving the heads of the departments in the plans and coming up with the plan, but in the actual translation into the financial numbers and putting it into somewhere like a QuickBooks that they can measure it, I think is really where the expertise of your accountants again, your consultants, your CPAs, your fractional controllers, your CFOs, that's where they can really add a lot of value to help the business owner think about what really makes sense or there's something missing here or this can be broken out a little more. Does this serve you? And also, what are you looking to get out of this? What kind of reporting are you looking to get out of this? And the frequency so the financial or accounting person can help to frame that in a way that makes that process meaningful. So it's not just spending a whole lot of time on the plan, but then what happens to the plan next so we can actually use that plan that's going to benefit the business.

Speaker 2:

And so we have these other financials. We're kind of working with the accountants. How do you recommend they engage the accountants? Do they just go and say, hey, give me all the stuff? Or maybe walk through how you work with some of your clients in developing those budgets specifically, Sure, I would say.

Speaker 1:

To start off with, I would say that process varies, like everything else, and I'm sure you've experienced that Both you and I, and particularly in recent times we work with smaller companies and each company is different and they have different objectives and different ways of working and so that process can be different. I would say, if it were an ideal process to work with an outside person, or your internal accounting, your fractional person is to talk to them about the process before you get started. I'm thinking about making a budget. I'd like to create a plan for next year. I'd like to talk to you about this plan. Can you help me get prepared for it? And so at that point the accounting professional would be looking at the chart of accounts, talking to the business owner about their plans. How can I help you with that? What information can I give you to help formulate your plans and to help give you some structure?

Speaker 1:

Often this will be in the form of an Excel spreadsheet to do some of the legwork before that plan might get entered into a system again like a QuickBooks to do the reporting. So engaging that accounting professional on the front end is really a good step. Sometimes that doesn't happen and what happens is that the small business owner will say we have this plan. My team, the department heads and myself and or myself, we came up with this plan or this budget. But we would like for you to take this budget and to help us to do reporting on it and or help us to get it into QuickBooks or get it into some sort of financial software and so that at that point often there is a little bit of massaging that needs to happen, a little bit of updating or revising, so that we're back to our comparability of what's in your accounting system and how those transactions are going to be captured, versus what is your plan Having that, having those match up.

Speaker 2:

And how often do you do you see like because an accountant? There's a wide range here. Right, when you talk about accountants, it can be anywhere from a bookkeeper that truly is data entry all the way up to say you know somebody like yourself that's a fractional controller. Where along that that, that along that range, do you feel owners should be comfortable and engaging and including that person?

Speaker 1:

Typically it's somewhere in that mid to upper range, primarily for the reason that bookkeepers are often quite busy with the transactional work, the recurring work, the day-to-day that's coming in and doing the budgeting and forecasting and reporting are typically activities that are a bit outside of that range.

Speaker 1:

It could require some Excel modeling. I've seen some very sophisticated models that have been created in Excel by business owners or again by their team members. I've seen business owners want an accountant person, accounting professional, to create those very sophisticated models and I know you've been involved with that and so having someone who has a bit more of the expertise and a bit more of the time, as well as a bit more of an overview of how those financial statements work together. We've talked a lot about expenses, but budgeting can also be done for your accounts, your balance sheet accounts, such as your accounts receivable and your loans and your cash and cash, is a big area where business owners would like to forecast. So having an accounting professional who understands those different elements, those different financial statements and how those accounts work together, I think is really helpful in putting together a comprehensive budget. That, again, is meaningful.

Speaker 2:

Phyllis, thank you for leading me into that. I agree. You can't just look at what the income statement is right. You can't just look at the revenue and the bottom line.

Speaker 1:

You really need to understand how that impacts the balance sheet as well, exactly, and, as I mentioned there, a lot of the budget projects and exercises on which I've worked have focused a lot on cash and cash burn, and for small businesses, cash is key. So your income statement definitely is driving that, but also the balance sheet. What liabilities do you have on the balance sheet? What loans do you have? When are they coming due? When are those payments coming due? How long does it take to collect your cash?

Speaker 1:

Do you have a large client or a large project that may result in a large payment at some point in the year? And so those are questions that someone who, again, is an accounting professional and is a bit seasoned can ask those questions. They've seen them before, they understand the mechanics of the business and they can put those elements together to help come up with that plan which, as we're talking here, is not just your income statement. But how does that result in cash and what does that look like for your accounts that you either have obligations you have to pay or you have receivables or other funds that are coming in to the business, and how do all those work together?

Speaker 2:

And Phyllis, how easy, in your opinion, is it to kind of keep track of all that in your head?

Speaker 1:

Not very, not at all. I'll say not at all. I have mentioned a couple of times during this conversation, as we've been talking, scott, I've mentioned Excel. Almost all of us have worked extensively in Excel and done modeling and again done this budgeting exercise in Excel, but also doing the reporting which next goes into QuickBooks. And I've mentioned QuickBooks because an overwhelming amount, a number of small business owners, use QuickBooks as well, as there are some other applications out there. Leveraging one of those applications to enter that plan is really, really helpful. When it comes to doing reporting, your system is already going to have reporting for your actual results, the transactions that, excuse me, that are incurred, but comparing that budget that's in that system to the actuals, if it's already there, then the reporting is so much easier and you spend a lot less time trying to come up with it and doing more time analyzing it.

Speaker 2:

Yeah, and maybe could you kind of give us a little bit of a framework around, like how do I get this into QuickBooks?

Speaker 1:

Sure. So QuickBooks is again. Most people are really familiar and have at the very least heard of it. A lot of folks are using it, have used it for a long time. There's QuickBooks Desktop, which is not as frequently in use now as it used to be because QuickBooks has come up with an online product called QuickBooks Online. It's a very easily accessible cloud product and over the past several years they have really added to the features and made it much more robust. It's much easier to access. You don't have to worry about putting it on a server and backing it up and all of the things that you had to be concerned about previously with QuickBooks Desktop.

Speaker 1:

But QuickBooks has different levels of subscriptions, which is great for different needs, and there are two subscription levels that permit the entry of a plan or a budget, and they are called QuickBooks Online Plus and QuickBooks Advanced. So having either one of those subscription levels will allow a user to enter in a plan, and these plans can be entered in in a couple of different ways. One is going into the actual software and there is a budget module at these two subscription levels and you can enter in your numbers, your amounts, your four-year accounts and again these accounts. Go back to the accounts that are in your chart of accounts already. As we've talked about, it has features to do some math there and divide things up and so forth, and there's also a feature to import.

Speaker 1:

So, as we talked about a few minutes ago, a lot of folks have their budgets, their plans, in Excel and putting that Excel information into a template. Those can be uploaded into QuickBooks as well. So there are a few different ways to be able to get that information into QuickBooks. Once you have entered it, you can make changes, you can make copies of those, you can make multiple budgets, which I think is great. You've probably, scott, experienced where a business owner or CEO says I would like to have two budgets, I'd like to have this one and I'd like to have what I call a stretch budget, or I might even like to have another conservative budget. So they may like to have different views of that same budget and you can do that in QuickBooks. You can create multiple budgets, right.

Speaker 2:

Yes, agreed, and I think that's a really good point of every budget is almost outdated as soon as you finish it right.

Speaker 1:

That is true. That is one element of it, one side of it. Another way to think about those budgets is a budget can be almost like a plan or a roadmap. Let's put this plan into place. We will all agree on it.

Speaker 1:

I've seen a lot of times where the budget plan is actually used to measure performance evaluations at the end of the year, bonuses, for example but often a budget can be made and set aside. Yes, you use it. To compare, however, to your point, scott, let's say it's three, six months down the road and interest rates have changed. The business owner has come up with a great new business opportunity or relationship that they didn't have at the beginning of the year. There's a change in cost of goods that they have to purchase. It's either gone up or gone down. They've had this wonderful opportunity to merge with another company or have some sort of joint venture.

Speaker 1:

So things can arise during the year that make that old budget sort of obsolete. However, the great thing is you can create another one in QuickBooks. So I would, at this point, maybe not call it a budget, but maybe call it a forecast. We've had a few months elapse. We've had three or four months elapse. The landscape has now changed. We want to make a new plan for the rest of the year, for how we think we will do, for the last six or seven months of the year, for example. So you can definitely have that flexibility to create another plan or, as I'm terming it here, a forecast for the rest of the year.

Speaker 2:

Yeah, and that's a really good approach, phil. I like that approach. It's good to go through, I think. What is the next 12 months going to look like? Or maybe most people kind of follow around the calendar year, but then also, if we're in May, let's do another forecast, right, let's make sure we're staying on track, and not just through December but beyond that. That's good to know as well that if you're doing that, let's say new forecast. Or if you want to call it new budget but really new forecast, you can also get that into QuickBooks to compare it to the actuals too.

Speaker 1:

Yes, you can. You definitely can. You can import a spreadsheet or you can create a new budget. You could put your actual results in for those first few months and then your new forecast in for those last as we're using in this example, six or seven months. So now you have a new plan, so you still have your old budget, you still may have a stretch budget, but you can also have different forecasts for different points in the year where, again, maybe the landscape has changed and you want to recast that.

Speaker 1:

And I would say one of the reasons that a business owner might want to do that again besides, they've had a very large change in one of those keys is just to help them to stay on track. Maybe they really need to re-forecast because they need to know about cash, they need to know how their cash is going to end up in a few months, because they might want to invest or they might need to get a new loan, or they might have extra cash to do something with. So I think doing those forecasts periodically are helpful, as well as that annual process of a budget, so both of them can really benefit a business.

Speaker 2:

I agree, and you shared a lot of tips, a lot of approaches and a lot of strategies here. Phyllis and I'd like to wrap up all of our shows here with one to three immediate takeaways that our listeners could you know as they walk after they turn off the podcasts and walk away. They can literally put into action. What can you share with us today?

Speaker 1:

I would say the first thing that if you're thinking about doing this is, don't over complicate it. It, as we talked about before, think about the big picture of things first, and what is it that we're trying to accomplish and what do we need to know? I would say secondly, back to and hopefully this is a recurring thing here. A recurring theme that we've talked about is making sure that your chart of accounts is set up, that your books and your records are already measuring in a way that's meaningful to you and that, if you need help, that's where you want to bring in an accounting professional. We're not quite capturing things in the way that are beneficial to us to measure or evaluate the business. Can you help us with that? I would say it's probably the second thing. Can you help us with that? I would say it's probably the second thing.

Speaker 1:

And then the third thing that's important is this is where your maybe your bookkeeper, your data person, comes in is making sure that things are being recorded to the correct buckets or the correct accounts, so as those transactions are occurring. Is this transaction a telecom, or is this transaction some other fee, for example, or is this a? Do I want this to go to travel in general, or do we really need to make sure that this gets recorded to lodging, because that is something that we are tracking? It's where do you want those actual expenses? So, keeping those three things in mind, don't overcomplicate. So, keeping those three things in mind, don't overcomplicate. Make sure that your framework is in place and check on how your actual expenses are being recorded. I think are our three keys to help being success to have a successful plan and successfully using that plan and that time that you've put into it.

Speaker 2:

I agree, fellas. I like those a lot. I also enjoy a good podcast or book recommendation. Do you have anything for us today?

Speaker 1:

For podcast. I really love listening to a podcast series called Revolutions. It is presented by a gentleman named Mike Duncan and he has written a few books, one being about the history of Rome and another about Lafayette. I think it's called Hero of Two Worlds. So that podcast is really great. He has several different podcasts of different types of revolutions of course, the French Revolution and the American Revolution, but also some others that aren't quite top of mind for folks. So I find that really entertaining and learning experience as well.

Speaker 2:

Yeah, I have to admit, as I've gotten older I've kind of gotten into some of that historical you know historical books a little bit more, so that's a new one. I'm gonna have to check that out, thank you.

Speaker 1:

Great great.

Speaker 2:

Well, Phyllis, this has been great. Where can people find out more about you online?

Speaker 1:

I would say I don't have a website. Usually, people will reach out to me either through a phone call or usually through my email, which is Phyllis P-H-Y-L-L-I-S-M Barnett, b-a-r-n-e-t-t at gmailcom is probably the best way to reach out. A-r-n-e-t-t at gmailcom is probably the best way to reach out, and also folks can reach out to you, scott. You and I have worked together on a few projects, and you are another accounting professional who is very familiar with this budgeting process, and so I think reaching out to you as well for advice and support on this topic is another avenue.

Speaker 2:

Yes, Phyllis. If anybody wants to get in touch with Phyllis, please feel free to reach out. I will be happy to make that connection, especially if you need somebody to come help your business out.

Speaker 1:

Thank you, Scott.

Speaker 2:

Yeah, and thank you for joining me today.

Speaker 1:

I've enjoyed it.

Speaker 2:

All right, folks, that's it for today. If you like the show or found something useful, text somebody new right now and say, hey, I have a podcast recommendation I want you to listen to and get back to me and tell me what you think of it. I'm Scott Keller and I hope you join me next time for Budget your Business.