As your business scales, you’ll reach a point where one person (you) clearing every expense is no longer efficient or feasible. So, it’s important to empower your leadership team to spend funds to the benefit and growth of their respective departments.
This is always a scary transition for any business owner because, oftentimes, there are no processes in place to keep employees from going off the rails with the company credit card. How can a business owner comfortably make the transition?
A basic profit and loss variance analysis is often all a small business needs. You’ll find a basic financial model is best. Overly complex systems are almost always overkill for small and young companies. While this may sound daunting, it’s pretty simple and inexpensive.
In order to develop a solid and simple budget variance for your business, work through the following four steps.
1. Create an annual budget and forecast
Figure out anticipated costs in regards to expected revenue. Determine how granular your budget should be. Oftentimes, less is more. Think about high-level functional areas of your business that fall under a senior team members’ jurisdiction.
If your budget is too granular, it is also time consuming and inefficient. For example, focus on total marketing spend rather than a specific amount for social media ads or paid search (i.e. Google Adwords). Let your team focus on how to allocate marketing spend. It’s their job to figure out the best allocation. It’s your job to make sure the total spend stays within allocations.
2. Ensure accurate bookkeeping
You can only understand actual spending if the transactional data behind the scenes is recorded correctly. Make sure your bookkeeper is on the same page with regard to transactions and corresponding account charts.
For example, if you take a client out to lunch to close a deal, then this activity should be categorized as a sales expense. If you buy lunch for employees in the office, then this falls under meals and entertainment in your operations budget.
Your bookkeeper needs to classify these types of transactions differently and consistently. Otherwise, you will not be able to accurately track spending per department, resulting in inaccuracies and misinformed decisions.
3. Track budget vs. actuals
In order to enforce budgets, you need an easy way to track each department’s actual versus planned spending. Do not complicate this process. There are plenty of robust systems to help with this; however, those systems are usually not necessary for many small or mid-sized companies because they are very process-intensive and expensive. Build a system that is easy to maintain, and simple to enforce.
4. Identify budget time periods
Complete your financials before you set your budget for any given time period. You can’t hold departments accountable for their budgets when you haven’t completed the books for that time period.
If you close out your books every quarter, then asking your departments to set a monthly budget is unfair: their financials are not in place to make a proper estimate. Instead, consider creating bi-annual or annual budgets and update departments each quarter with an email on their financials (e.g., At the end of Q2 you were at 75% of your annual budget. Please avoid going over budget and slow spending down the rest of the year.).
We typically recommend that smaller companies set up quarterly budgets with monthly financial updates. This helps business owners to keep spend in check, and allows some buffer room to course correct if needed.
This article has been edited.
Michael Burdick is CEO of Paro, the alternative employment model for the future of finance work, which empowers people to do what they love.
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