Managing to a Budget in Your Design Firm
Do you currently create a budget for your new year and then manage to it? If so, you are going to enjoy this blog. If not, I ask that you read with an open mind and perhaps are swayed to begin this process of financial management. Either way – let’s talk about budgets and how to manage to them effectively in your firm.
If you are wanting to learn more about money management, the following podcasts will be beneficial: Episode 138 (setting easy money goals) and Episode 140 (managing those money goals).
I started my business somewhat by accident and definitely not with a plan, at least no plan past performing the service, creating the product, getting paid, making a deposit – repeat. And at the beginning, this served me. I had no idea how to price effectively, no idea how to create a financial plan that met the needs of my company and setting a budget would have seemed like a useless task at that point. But, wow, was I uninformed. If only I had a budget, then the headaches it would have saved me would be numerous.
Creating a budget can be a very detailed, arduous task, or it can be an opportunity to create a financial pathway to success.
It can be fun, not drudgery. Now, I look at it like a puzzle and I am just putting the pieces together to create the business I want. That small mindset shift has really helped me in this process. As I like to say – I am telling my money where to go instead of wondering where it went. Let’s leverage your business finances to create your custom budget.
The first step is to create a budget in an easy-to-use format with your other financial applications.
I love to create my budget simply by going into my QuickBooks Profit and Loss statement for the prior year and downloading it into Excel. The beauty of this is that it allows my budgeting to match line by line to my accounting software. Once I was working with a company that budgeted separately from their QuickBooks and it was a headache to interpret. We were constantly having to remember what was assigned to which category in QB and it was time intensive. Making them match solved the problem and made budgeting easy.
After I look at that prior year P and L.
I go line by line and use my high-level financial goals (what revenue do I want, what is the net profit I am projecting) and merge those big goals into the day to day of what it takes to accomplish my strategic plan for the year. Questions are asked such as:
Is this an income or expense I can plan on existing again for the coming year or was it a one-off?
Will this increase or decrease in the next year?
What can I do to change, add, or delete this item?
Is this financially viable for the new year?
Once the amounts have been adjusted for the year, I make sure that all the anchor points are matching my large financial goals.
This includes Total Revenue, COGs, Gross Profit, Expenses and Net Profit. My next decision is if I am going to budget simply to the anchor points or to the line items. When I began budgeting, I looked at anchor points. This means that every month I updated an excel document to see how much of my budget had been taken up in that month and in the cumulative past months. As my business grew, I needed to know more detail, so I moved to line-item budgeting. In this instance, each line item on the P and L was compared to the budget for the year to see if I was meeting what I thought I was going to, going over or under. You can choose to manage this in a budget worksheet, an online application or even in a statement of cash flows.
Quicky, after line-item budgeting, I realized I needed to break it apart by month.
This is because all my money – and your money – does not come into the company in the same month the expenses are hitting. I needed to be prepared for that big bill in October which would be funded by my income from July – September. In some months the expense needs were higher than others, and knowing which months were heavy in income and which were heavy in expenses helped me make better decisions about my money. Knowing your financial health will help you scale your interior design firm in a positive manner and see real results.
If you have never budgeted, start slowly. But creating a plan for the income that you expect is crucial to your ability to manage your finances with reduced stress. I cannot express the amount of ease and relief to know that a month will be in huge need of financials and that your money management allows those funds to be available without added frustration. Consider the need to pay quarterly taxes as an example of this in action.
Budgeting does not need to be a standalone function in your company. It will be tied to your financial plan and goals, along with your cash flow and profit first planning. Think of this as another tool in your financial toolbox.
Some of you reading this blog may be thinking that you don’t need to do this. But let me throw out a few statements I often hear that might change your mind.
“I am not getting paid enough for all the work, headache and stress I have with this business.”
This is a statement I hear with small companies and even very large ones. Why? Because this is a hallmark statement of a company owner who has lost touch with the financials. I usually see this when an owner does not recognize all that is considered to be owner’s compensation and is not familiar with the P and L and Balance Sheet – or – they do not have a plan and pricing structure that allows them to be paid. Or, they have money banked in their accounts but are scared to pay themselves because they don’t know what is coming. All of these are indicators that a more secure and detailed plan and monitoring system are needed for the financials.
“I don’t know what my expenses are for the next few months or what revenue I need to make that happen.”
This reminds me of the statements we see on social media that go like this: Tell me you don’t have a grasp of your financials without telling me you don’t have a grasp of your financials.
If you have a budget that is broken down by month, you should always have a clear idea of what is coming and what is being planned for. This will impact your sales approach and how you manage paying the bills – along with additional spending and hiring plans.
“I need to hire, but not sure I can sustain their pay.”
Ok, this means you did not budget for them. And by budgeting for a new hire, I mean creating a job description, assigning a payment amount, budgeting for it 3 months in advance, considering the impact to revenue generation and the impact to additional expenses and making the plan.
Try this way – just try it. And see if it doesn’t work out better than hiring with your fingers crossed.
I can keep going with statements similar to these, and you will feel the pain points as I do. If you want to tell your money where to go – create a budget. If you want your money to just go – don’t. Sometimes, I ask people if they would have rather had the money that they spent on something or that particular item. And 9 times out of 10 if it was an impulse purchase, they would choose the hard cash every time.
And that is the beauty of a budget. It is a blueprint for spending. It is like creating your meal plan or packing list for a trip and then going a bit on auto pilot knowing everything will work together. Not doing this and just winging it always leaves you in a state of questioning if you got everything and will it all work out.
Taking the time to work it out in advance saves you brain power to work on something else and peace to move through your day and week with an assurance that all will be okay.
It is worth it. I promise.
Create the financial puzzle that you want. Make the puzzle box beautiful. Create a visual vision board with what you hope to accomplish – then create the budget to make that reality.
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