April 15, 2024

You’re the Boss Blog: Why I Finally Decided to Make a Budget

Staying Alive

The struggles of a business trying to survive.

I read Ami Kassar’s recent post on sloppy bookkeeping with interest because I spent so many years struggling to figure out why I was always running out of money.

I do have an excuse: I started my business a long time ago, in 1986, and many of the business tools we take for granted didn’t exist, or at least weren’t accessible to a tiny company like mine. Obviously, I had no Internet, e-mail, cellphone or Web site. It may be hard to imagine, but personal computers were just getting started, spreadsheets were primitive, and QuickBooks was years in the future. So I got off on the wrong foot, and it took me a long time to recover.

Fast forward 26 years, and I have put in place a reasonable set of accounting tools and learned to do a little spreadsheet writing. I now do my bookkeeping and accounting with QuickBooks. I calculate my pricing for custom work with Excel. And I track cash flow using Google spreadsheets. With these, I can do all of the standard accounting tricks, which mainly look backward in time at what happened to my money, and even look a little into the future to predict short-term cash flows. Until last week, though, I had never created a budget for the coming year.

I have found it to be much easier, using QuickBooks, to look backward rather than forward. Maybe this is because accounting is geared toward actual transactions and is less equipped to handle the future. Maybe it is because the conventions of accounting date back hundreds of years and just haven’t been updated to take into account the ubiquitous spreadsheet, which allows for easy modeling of future cash flows. Or maybe it is because I’m simply uneducated with regard to the accounting software I use and can’t figure out how to make QuickBooks do my bidding.

If you don’t find those excuses to be convincing, and you shouldn’t, here is a better one: I was very, very busy with selling until recently, when I handed off that responsibility to my employees. Suddenly, I find myself with time to think about things, and I’m doing projects that I should have done years ago. One of them was to try to figure out whether I would be able to afford to pay myself a decent salary this year and also hire a couple of workers. So I decided to do a budget for 2013.

I had just run a profit-and-loss report out of QuickBooks, comparing 2011 and 2012, to see how much I was spending on materials and whether there had been any surprise expenditures. It was interesting to consider the entire chart of accounts, which for my small factory has more than 100 main accounts and subaccounts. It occurred to me that it would be simple to export the current P.L.report as an Excel sheet and use the existing chart of accounts as budget line items for the following year. That way, I would not forget to include obscure yet expensive expenditures like leasehold improvement depreciation. With two years’ spending in each category, it would give me a good start toward figuring out reasonable amounts to budget for the coming year. And I could, with a little effort, convert some of the cells from straight numbers to formulas that varied with income, so that I could model alternative situations.

I’m not a spreadsheet genius, but I have learned enough to accomplish my goals: how to write simple formulas and how to make a cell in one sheet refer to a result in another. With that level of mastery, I was able to set up the budget so that the material spending varied as a percentage of revenue, with the baselines determined by averaging the previous two years. I was also able to assemble a separate sheet that had a complete model of my employee labor costs, including pay rates; forecasts of hours of regular time and overtime for each worker; the federal, state, and unemployment taxes that their wages would generate; and their retirement plan contributions.

Because this is so complicated, I have made a copy of the original — with the numbers scrambled a bit for the sake of my privacy — and posted it here. It’s a Google Doc and shows only the values of the cells, not the formulas, so I added some comments to clarify the relationship between the budget and labor sheets. Also, the chart of accounts is ours, and your results may vary. I don’t expect anyone to copy this exactly, but it will give you an idea of one way to set up a budget and make it into a forecasting model.

When I finished my budget using my real projections — including a rise in revenue to $2.4 million, a reasonable salary for myself, what I expected to pay all of my people, and expenditures for materials proportional to the rise in revenue rise — I found that I would have only $54,000 left over. That is pretty slim pickings out of $2.4 million. It wouldn’t take much of a revenue shortfall or unexpected expense to wipe it out entirely.

Of course, I could make that number jump by cutting employee salaries, or my own salary. I did budget $73,500 for some projects I expected to complete: a second Web site and some computer and machinery purchases. But I could choose not to spend that money and improve my bottom line. The most promising source of savings, though, is materials. I’ll be taking a hard look at some of those expenditures to see whether we cannot buy more efficiently.

After doing all of this, I went back to QuickBooks to take a look at the built-in budgeting tool. There is one there, but I found it disappointing. (Here is a reasonably succinct explanation of how to use it.) What it does not do is let you import the previous year’s actual spending to use as a starting point, and it also does not seem to allow you to enter formulas to make different accounts dependent on each other, which is why I much prefer using a spreadsheet. I wish that there were a simple and painless way to set a budget, but — as with so much of the financial side of running a business — there are not any shortcuts.

Getting back to Ami’s post, it covered all of the reasons to keep your books up to date. And I have nothing to add — except to say that once I started putting in the time every week to see where my money was going, I suddenly had more of it. Not always as much as I wanted, but enough to build up a decent amount of working capital over the last three years. Now, with my budget in hand, I hope to do even better in 2013.

Paul Downs founded Paul Downs Cabinetmakers in 1986. It is based outside Philadelphia.

Article source: http://boss.blogs.nytimes.com/2013/02/12/why-i-finally-decided-to-make-a-budget/?partner=rss&emc=rss

Bucks: Your Hazy Future Is No Excuse for a Lack of Planning

Carl Richards

Carl Richards is a certified financial planner in Park City, Utah, and is the director of investor education at BAM Advisor Services. His book, “The Behavior Gap,” was published this year. His sketches are archived on the Bucks blog.

Who do you think you’ll be in a year? Five years? Twenty years?

One of the big problems with setting goals, especially financial ones, is that we’re really bad at imaging our future selves. Just remember what you imagined you’d be as an adult when you were a kid. I’m guessing there are some gaps between the dream and the reality.

Earlier this year, Alina Tugend outlined some of the science behind this problem in The Times:

…many of us don’t have the incentive to eat healthy or save money or add to our retirement accounts because we think of ourselves in the future as someone different altogether. In fact, a future self can seem to be this annoying other person who wants to prevent you from having fun in the present.

The reality is that when we talk about financial goals we’re often talking about long time frames. When we talk about retirement, it could be upward of 20 or 30 years. You can’t even imagine yourself at that age, let alone plan for it. That’s your parents, not you!

We do the same thing with our children. When my first daughter was born, college was the last thing on my mind. But by the time we had our fourth child, I had a good idea how fast 18 years would go by. When we start talking about our distant future selves, it’s easy to rationalize the decision to not do anything.

But there’s a problem, as Ms. Tugend explained. When the future arrives:

…we’re still the same selves we were last week or last month. We don’t want to drink the icky liquid, and we don’t necessarily feel we can afford the time to do worthwhile, but time-consuming, deeds.

So what’s the solution?

Start by getting really clear on your goals. Yes, nailing down the details may not happen right away, but don’t pretend that 18 is a long way off for your first-grader. It’s not.

You may feel like you’re still 30, but if you just celebrated (or mourned) turning 40, it’s time to get real. Our future selves will be here faster than we think. Remember all the stupid stuff you did as a teenager? Don’t be the 60-year-old that wants to hit your 30-something self over the head for doing stupid adult stuff, like not getting clear on your financial goals.

I promise you that your future self will be happier the sooner you reconcile today with tomorrow.

 

Article source: http://bucks.blogs.nytimes.com/2012/09/24/your-hazy-future-is-no-excuse-for-a-lack-of-planning/?partner=rss&emc=rss

Corner Office: WET Design and the Improv Approach to Listening

Q. What’s unusual about your company’s culture?

A. We have three classrooms and a full-time curriculum director who teaches all the time and also brings in outside instructors. One of the really fun classes we do is improv.

Q. Why improv?

A. Improv, if properly taught, is really about listening to the other person, because there’s no script. It’s about responding. I was noticing that we didn’t have a lot of good communication among our people.

If you think about it, if you have an argument with your wife or husband, most of the time people are just waiting for the other person to finish so they can say what they’re waiting to say. So usually they’re these serial machine-gun monologues, and very little listening.

That doesn’t work in improv. If we’re on the stage, I don’t know what goofball thing you’re going to say, so I can’t be planning anything. I have to really be listening to you so I can make an intelligent — humorous or not — response.

So I got this crazy idea of bringing in someone to teach an improv class. At first, everybody had an excuse, because it’s kind of scary to stand up in front of people and do this. But now we’ve got a waiting list because word has spread that it’s really cool.

You’re in an emotionally naked environment. It’s like we’re all the same. We all can look stupid. And it’s an amazing bonding thing, plus it’s building all these communication skills. You’re sort of in this gray space of uncertainty. Most of us don’t like to be uncertain — you know, most of us like to be thinking what we’re going to say next. You get your mind into a space where you say, “I’m really enjoying that I don’t know what he’s going to ask me next, and I’m going to be open and listening and come back.”

We’ve got graphic designers, illustrators, optical engineers, Ph.D. chemists, special effects people, landscape designers, textile designers. You get all these different disciplines that typically you would never find under one roof — even making a movie — and so you have to constantly be finding these ways to have people connect.

So we do things like improv, and I think they really have developed our culture.

Q. What else?

A. We also encourage people to put their ideas on our walls. Or if you’ve got a drawing, you can stick a couple of magnets on it. The point is to get people to put their stuff out where other people can see it. We don’t want a culture of, “That’s my idea. I don’t want anybody to see it. Maybe they’ll find a flaw in it.”

I had a teacher once who said, “Whenever you guys are sitting here, and you realize that you’ve made a mistake on something you’re working with, I want you to applaud yourself.” He said: “That will accomplish a couple of things. First of all, instead of saying, ‘Oh, I made a mistake, I’m never going to learn this stuff anyway,’ you’re going to reward yourself because you caught the mistake before I did.” We all rolled our eyes in the class, but I’ve never forgotten that.

So one of the things I will do is to start some meetings by saying, “Let me tell you where I just screwed up.” That sets the tone of, we’ve got to put our mistakes out there. They don’t call it “learn by trial and success.” You learn by trial and error.

Q. What else have you done through the years to set the tone for your culture?

A. Early on, I decided that whenever somebody comes into my office and starts blaming something on another department, I will say: “Really? Let’s get them in here. Hold that thought.” It’s just like with your children at home — you don’t want serial tattletaling. You get everybody together, and then suddenly people are saying that maybe they exaggerated a bit, and things weren’t quite as bad as they said.

Article source: http://feeds.nytimes.com/click.phdo?i=772219d573e56931c6855f01ed448e75