243: Managing to a Budget in Your Design Firm 

Michele  00:00

Hello, my name is Michelle, and you're listening to Profit is a Choice. Do you currently create a budget for your new year and then manage to it? If so, you're going to really enjoy this podcast and if not, I ask that you listen with an open mind and perhaps you might be swayed to begin this process of financial management. Either way, let's talk about budgets and how to manage them effectively in your firm.

Every day, empowered entrepreneurs are taking ownership of their company financial health and enjoying the rewards of reduced stress and more creativity. With my background, as a financial software developer, owner of multiple businesses, and the interior design, industry, educator, and speaker, I coach women in the interior design industry, to increase their profits, regain ownership of their bottom line, and to have fun again in their business. Welcome to Profit is a Choice.

Before we jump in, there are two episodes that you can find in my past podcast that discuss money management. I want you to listen to Episode 138 about setting easy money goals, and then Episode 140, about managing those money goals.

Early in my business, I started somewhat by accident, and not fully with a plan, actually not with a plan at all really. No plan past perform the service that the client wanted, create a product, get paid, deposit, and repeat. In the beginning that served me well, it was fine. I didn't have a firm grasp of how to price effectively. I didn't create a financial plan. For those of you who have read part of what I wrote in the book and have been listening to the podcast for a while, I certainly didn't do a lot right at the very beginning with finances, even though I knew better. Just because it's not where I was focusing. I never had a budget or anything and if you had asked me about creating a financial plan and a budget when I first started, I would have thought you were kind of crazy, and maybe that was a useless task. I'll tell you, wow, I was definitely uninformed or not paying attention. If only I'd had a budget, the headaches that I could have saved over the years would probably be huge.

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 actually be fun, and not drudgery. Now I like to look at it as a puzzle and I'm just putting the pieces together to create the business that I want. This small mindset shift alone has helped me in the process. As I like to say I'm telling my money where to go, instead of wondering where it went.

The first step is to create a budget, I usually just simply go into my QuickBooks, go into the profit and loss statement for the prior year or the completed year, and download 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 completely separately from their QuickBooks, and I have to tell you, it was a headache to interpret. We were constantly having to remember what was assigned which category in QuickBooks and if we did something here, what did it do there, it was time intensive, and it was a pain and it honestly made creating the budget and managing the budget, something that we didn't even want to do. After we corrected everything and made the budget match the P&L it made it so much easier.

After I look at my prior year's P&L, I go line by line, and then I use the financial goals that I've set at a higher level and merge them all together. So, in other words, I start by kind of doing a high-level financial planning goal-setting session, but this is the revenue, these are the cost of goods, the big anchor points, revenue, cost of goods, gross profit expenses, and net profit. Then I take that and go into a budgeting process where I take the prior year’s P&L, and then I increase the revenue to match my increased revenue. Perhaps I'm increasing or decreasing expenses, but I'm working within the details to make it align with the high-level planning and goal setting that I have already done for those large anchor points.

Then I start asking questions, thinking about what it's going to take on the day-to-day to accomplish this financial plan through budgeting. I asked myself questions again, is this an income or an expense that I can plan on for the coming year? Or was it maybe a one-off? One thing that happened that I know is not going to happen again, I can take that out of the budgeting process. Will this expense increase or decrease in the next year? What can I do to change, add, or delete this item? And then is this financially viable for the year? Once the amounts have been adjusted for the year, I make sure that all the anchor points match the large financial goals again. So, this includes total revenue, cost of goods, gross profit, expenses, and net profit. I want to make sure that I've kind of got those anchor points as solid as I can.

My next decision is, am I going to budget simply to those anchor points, or line items? When I first began budgeting, I pretty much just looked at anchor points. I knew that by the end of the year, this was what I needed those five anchor points to be. Every month I was looking at how close I was getting to those. So, every month, I would update my Excel document to see how much of my budget had been used up along with that month and in cumulative months. But I was only looking at those five indicators, those five KPIs, if you will.

As my business grew, I knew that I needed to know more details. I moved more into line-item budgeting, which is what I was explaining earlier, where you take the P&L and go line by line. In this instance, each line item on the P&L was compared to the budget for the year to see if I was meeting but I thought it was going to be going over under and then not just managing to it by looking at the number but then asking why what happened, what assumptions that I made, what things are changing, and what is it going to do downstream to the budget. You can choose to manage this in a budget worksheet and online application, or even in a statement of cash flows.

Quickly after line-item budgeting, I realized I needed to break it apart by month. This is because all my money and perhaps your money doesn't come into the company in the same month as the expenses are hitting. They're sometimes hitting in opposite months. I needed to be prepared for a big bill in October, which might be funded by income from July through September. Some months the expense needs were higher than others and knowing which months were heavy in income and expenses helped me make better decisions about what to spin and when to spend it.

If you've 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 can't express to you the amount of ease and relief to know that a month will be huge in need of financials and that the money management allows the funds to be available without added frustration. You know, even just think about quarterly taxes. By the time we owe taxes in April, June, and September, we have to have already been saving that money, planning for that money, and holding that money back as a budgeted item for the three months prior.

Budgeting also is not and does not need to be a standalone functioning or the company is going to be tied to your financial plan, your financial goals, along with cash flow, and even Profit First planning. So, think of this as another tool in your financial toolbox.

Some of you listening may be thinking that you don't need to do budgeting that's just not for you. But I'm going to throw out a few statements that I often hear that can change your mind.

Here's the first one. I'm not getting paid enough for all the work, the headache, and the stress that I have with this business. This is a statement that I hear with small companies and even very large ones. Why? Because this is a hallmark statement of a company owner who's lost touch with their financials. I usually see this when an owner doesn't recognize all that's considered to be the owner’s compensation and maybe they're not as familiar with the P&L and the balance sheet or they don't have a plan and pricing structure that allows them to be paid or maybe they've got money banked in their accounts, they've been making it, but they're scared to pay themselves because they don't know what's coming. All of these are indicators that a more secure and detailed financial plan and monitoring system are needed.

Second statement, 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 statement that we often see on social media that goes something 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. Because if you have a budget that is broken down by month, you should always have a clear idea and indication of what is coming and what's being planned for. This is going to impact your sales approach and how you manage paying bills along with additional spending and hiring plans.

Third statement I need to hire, but I'm not sure I can sustain their pay. This means you didn't budget for them and by budgeting for a new hire, I mean creating a job description, assigning a payment amount, budgeting for it three months in advance, considering the impact on revenue generation, and the impact on additional expenses and making the plan that’s going to make it all work. Trust me and give it a try this way, just try it. If it doesn't work out better than hiring with your fingers crossed, let me know. But I can't imagine that that could happen.

I could keep going on with statements similar to these and you'll feel the pain points. If you want to tell your money where to go create a budget, if you want your money to just go then don't. Sometimes I ask people if they would rather have had the money, they spent on something, or the particular item they spent the money on. And nine times out of 10 If it was an impulse purchase, they're going to tell me they wish they had the hard cash every time.

That's the beauty of a budget. It's a blueprint for spending. It's like creating a meal plan or a packing list for a trip and then going a bit on autopilot because you know everything's going to work well together. Not doing this and just winging it leaves you in a state of questioning. If you've got everything, did you plan for everything, and will it all work out? So, take the time to work it out in advance, because it saves you brainpower to then go work on something else in peace to move throughout the day and the week with an assurance that it's all going to be okay.

It is worth the time that you put into making this happen, I promise it really is. It is not enough to create the budget we have to manage to it. Create the financial puzzle that you want. Make the puzzle box beautiful, create what you want, a visual vision board with what you hope to accomplish, and then what are the financials and the budget that are needed to make that a reality.

I've got something really big coming soon and so I want you to watch my website and newsletters for a first look at the solutions that my team and I are creating to save you time, energy, and money and the financial management of your firm. In the meantime, sign up for my newsletter that's full of actionable tips, and while you're on my website ScarletThreadConsulting.com head over to the Work with Me page and fill out a discovery form. Let's get your business blueprint ready because I believe you have a year of success ahead of you.

Being intentional creates profits and profit doesn't happen by accident. Profit is a Choice is proud to be part of the design network.org where you can discover more design media reaching creative listeners. Thanks for listening and stay creative and business minded.