Have you ever tried to create a budget for your business, only to find that it’s more complicated than you thought? It can be tough to know where to start or even where to cut corners. But don’t worry – we’re here to help. This post will outline how to build a spending plan for your business. So whether you’re just getting started or looking for ways to tighten your budget, read on for tips and advice.
What a Spending Plan Isn’t
A spending plan isn’t a budget but more of a strategy to understand your expenses better. Budgets are a license to spend, so we don’t like to use budgets. We prefer forecasts when it comes to putting numbers into categories for the future. That being said, you will need to establish a framework to know whether you should increase spending or not.
Areas of Spending Plan
There are two main areas of any spending plan. You will need to establish how you decide to take new spending, and you will need to know whether your current spending is valuable. Ultimately, that is what we are looking for, the value of the expense in question.
First, let’s look at new spending. This is a basic framework to understand the value of any new expenditure you may wish to take on. It is hierarchical in that you can move down the list of questions to see how the expense impacts your business.
This is the first question that should be asked. Does this new spend increase revenue less cost of goods and labor? If it does, you can stop and don’t have to do further analysis because this new expense will bring value to the business. You need to move to the next question if the answer is no.
Cost of Goods
The next question is whether the new expenditure will lower the cost of goods sold to the point where the increase in gross profit is larger than the expenditure. If the expense is higher than the increase in gross profit, you can either nix the spending or move on to the next question.
The next question is whether the new spending will make direct labor more efficient or lower the overall direct labor expense by at least the amount of the expense. The key here is getting more gross profit for every labor dollar spent.
If the new spending doesn’t impact direct labor, we move to how it affects operating expenses. The question here is whether the new spending will lower another operating expense.
Finally, if none of the above conditions are met, you analyze how the new spending affects your culture and brand. The questions here are whether an increase in spending will maintain the brand and culture or if the new spending doesn’t happen, will it negatively impact your brand or culture?
The primary basis to evaluate expenses you already incur is to analyze if the spending is still valuable. There is no magic here. You need to look at each major expense category (Facilities, Marketing, and Other Operating Expenses) and justify each expense within those categories. Be sure to review recurring charges and those expenses charged to a credit card by your team.
Forecast vs Budget
As I mentioned at the beginning of this post, this is not about creating a budget. This is more about creating a strategy and framework to evaluate expenses. That being said, it is always good to get an idea of your future, so I suggest creating forecasts.
The practice of creating a forecast will allow you to use your spending plan proactively. First, you will get to evaluate your ongoing operating expenses to see if anything needs to be adjusted, and then you can plan for new spending based on the framework for new spending.
A full forecast may require an advisor to help, but you can get an idea of forecasted expenses based on your past behaviors and future plans.
Building and maintaining a spending plan is vital for your business. Establishing a framework around new expenditures and ongoing operations will help you determine the value of your expenses.
If you need help setting up your spending plan or forecasting your finances, please let us know, and we can let you know how we help with these critical issues.