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Your Clients, Their Budgets and You

Cathy Roth
Posted by Cathy Roth on Oct 15, 2021 11:54:21 AM

Recently I read a blog post about the ins and outs of a budget surplus. That article sent me back to memories of some of the companies I've worked with before who operated without any budget at all. As a bookkeeper or accountant, what is your role in helping your clients with their budgets? 

Hopefully, your clients already have operating budgets and regularly review actual numbers versus budgeted numbers. Unfortunately, it is very possible that all of your clients don't have a budget, and, if they do have one, it is just stored in a file somewhere. So, what can you do to help your clients? Here is some information for you to share with your clients. 

Why do you need an operating budget? 

Simply put, an operating budget allows you to make an educated guess about the future of your business, compare what is currently happening with what you thought might happen, and then make wise decisions overall about your business. Using a budget as a tool can be the difference between an enduring business and shutting your doors. 

Budgets may be required for a number of scenarios (loans, investments, board of directors), but are critical for ALL businesses. 

How do you create an operating budget? 

1. Review Historical Data

First, your accountant or bookkeeper is the best place to start. Rely on their training and knowledge to provide valuable input.  Prior to creating your budget, there may be additional work that needs to be done on your books or it might be the perfect time to tighten up your chart of accounts. The most important thing is to ASK what they recommend be done prior to starting your budget process and then follow through on the advice they give. 

Second, review a profit and loss statement by month for the past 12 months. This spreadsheet allows you to see what has happened in your business, in terms of revenue, fixed costs and variable costs. Look for trends, such as seasonal impacts on your business. Also, identify anomalies in the data and quantify any changes in the historical operating conditions.

Do NOT skip this step. You may have an intuitive feel for your business, but until you fully analyze the data, you are simply running your business on feelings and not facts. In addition to reviewing the data on your own and with your team, schedule time to review the data with your accountant or bookkeeper. 

2. Make Reasonable Assumptions About the Future

No one is a fortune teller, but there are questions you should ask and answer to help you project the next twelve months. There are three sources of information that can provide information to drive your assumptions.

First, look internally. What trends are your sales team seeing? Are you planning an expansion or a downsizing? Does your operations team have any concerns?

Second, look externally at global concerns or trends. Are the current supply chain disruptions or labor shortages affecting your company? Look to industry journals and global forecasts to provide information about short- and long-term projections.

Finally, look to your competitors. What are they doing? Are they adopting a defensive posture? Are they expanding? 

3. Project Revenue

Combine your historical data with your assumptions about the future to produce revenue projections. Your projections should include how many items/services will be sold and the price at which you will sell them. As you build your revenue projections, keep in mind that although the revenue may be difficult to meet, it must be possible. Don't get caught in the trap of projecting aspirational goals that simply won't happen. 

4. Project Cost of Goods Sold (COGS)

Once you have identified what you expect your sales to be based on quantity/price, you will be able to calculate COGS to reach that level of sales. Your calculations again will be based on a combination of historical data with your assumptions about the future. In your COGS projections, make sure you include all costs, both direct and indirect. 

5. Project Other Expenses

Base your projections for other expenses on a combination of historical data with your assumptions about the future. 

6. Calculate Projected Operating Income

Using the formula for Operating Income, calculate your expected operating income. 

7. Review Your Budget

At this stage, you need to analyze your budget. Are your assumptions reasonable? Do you need to make operational changes? Return to your team and have them provide feedback on areas of the budget pertinent to them.

This is another area that businesses are often tempted to skip. Do NOT give in to that temptation. If your budget is not based on accurate historical numbers and reasonable assumptions about the future, it becomes a completely useless tool for your business. Investing the effort in a thorough analysis is the only way to ensure that your budget is a useful tool.

8. Use Your Budget

Unfortunately, some businesses create budgets, but then don't follow through and actually use them. It is critical to close your books accurately each month in a timely manner and then compare actual numbers to budgeted numbers. If you have departments in your business, task your department heads with a monthly review of actual versus budget numbers and require an explanation for all variances. Conduct an overall comparison of actual versus budget for the entire company, review all variance explanations provided (if you have departments), and provide explanations for all company variances. 

9. Analyze Variances to Make Decisions

Budget variances may suggest a need to make operational changes. Look at trends both within a single month and also month over month to determine how to respond.  

10. Rely on Your Bookkeeper or Accountant

Your bookkeeper or accountant truly is your best resource. Involve them both in budget creation as well as ongoing monthly reviews of your business. They truly deserve a seat in your boardroom, not in your back office. 


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