Nothing about starting your own company is easy. Thankfully, when it’s just you and your partner, it’s fairly simple to monitor your spending and keep your budget in check.
You’ll reach a point though where one person (you) clearing every expense is no longer efficient or feasible. 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 checks or processes in place to keep employees from going off the rails with the company credit card.
How can a CEO or owner comfortably make this transition? Setting up a basic profit and loss (P&L) variance analysis is often all a small company needs. You’ll find that starting with a basic financial model is enough for your business, as overly complex systems are almost always overkill for smaller or younger companies. While this may sound daunting, it’s actually pretty simple (and better yet, inexpensive).
So, how do you start? In order to have a solid and simple budget variance for your company, you need to work through these four steps:
Step 1: Build a Forecast and Budget for the Year
Before enforcing any budget, you need to set one up. In its most basic form, this means figuring out what your costs should look like based on expected revenue. Additionally, determine how granular to make your budget: oftentimes, less is more. You’ll want to think about high-level departments that would fall under an executive-level employee’s jurisdiction. If your budget is too granular, you risk getting caught in the weeds, which can be very time consuming and inefficient. For example, focus on total marketing spend rather than the specific amount spent on Facebook or Google Adwords, and let your employees focus on how to allocate that marketing spend. It’s their job to figure out the best allocation of the marketing budget, and it’s your job to make sure that the total marketing spend stays within those allocations.
Step 2: Make Sure You Have Accurate Bookkeeping
Understanding actual spending is only doable if the transactional data behind the scenes is recorded correctly. Make sure your bookkeeper is on the same page with regard to the transactions and the appropriate account charts they fall into. These can be accounts of costs that were incurred by a specific department or group. For example, if you take a client out to lunch to close a deal, then this should be categorized as a sales expense. If you buy lunch for employees in the office, then this would fall under meals/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.
Step 3: Track Actuals Versus Budget
In order to enforce budgets, you need an easy way to track each department’s actual spendings 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.
Step 4: Identify Time Periods for Setting Your Budgets
Make sure you 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 your plan is to close out your books every quarter, then asking your departments to set a monthly budget is unfair: their financials are not in place for them to make a proper estimate. Instead, consider setting bi-annual or annual budgets, updating departments each quarter with an email on their financials such as, “At the end of Quarter Two, you were at 75% of your annual budget. Please avoid going over budget and slow your spending down the rest of the year.” We typically recommend that smaller companies set up quarterly budgets with monthly financial updates. This enables owners to keep spend in check, and allows some buffer room to course correct if needed.
Author: Michael Burdick is CEO of Paro, the alternative employment model for the future of finance work, which empowers people to do what they love.