Recently I was doing a budget for myself and my partner. We each own a small business so I end up doing three budgets. One for our joint expenses, and one each for our businesses.
This gets tricky when we start talking about my partner’s company because he has very unpredictable revenue streams. We try our best, but inevitably we’re guessing for parts of it.
Later in the year when we go to compare our budgets to what actually happened, it’s never “right”. We never end up with numbers that are exactly what we budgeted. Unfortunately this will always be the case, unless we can find an all-seeing crystal ball on ebay or something.
Weird stuff is inevitable
Do you ever look at your budget part way through the year and think, “well this is useless now, I’m not even close to this” or maybe “hmmm well, when I created this budget I didn’t know that was going to happen, soooooo I’m just going to change the budget.”
Stop. Don’t do it. Relax.
Don’t trash or change your budget. It defeats the purpose of the budget in the first place.
Life is weird and unpredictable, which is what makes it interesting. It’s also why our budgets never match exactly what happens in our businesses. The good news is, that’s okay! Yeah, that’s right, it’s okay if your budget doesn’t match your actual numbers. In fact, there’s no way you’re going to get a 100% match.
The point of the budget is to think through our intention for the year, and try to have a guideline for making financial decisions throughout the year. It’s a measuring stick so we know if we’re veering off course. It’s better to course-correct early before it becomes an issue.
There’s another kind of budget?
My partner is not an accountant, he’s a magician. Yup, you read that right, a magician, as in top hats and card tricks (insert joke about creating money from nothing or making me disappear or magically finishing all the housework). We think about money very differently and he really doesn’t love the budgeting process. He enjoys the end result of having the budget (“enjoys” might be over selling it), but the process isn’t his favourite.
It’s tough to keep in mind that this is not a budget of cash moving in and out of the company, it’s a budget for when income and expenses will be incurred. That means when he invoices customers, not when he gets paid, and when he receives bills, not when he pays them.
Wait, what? Why wouldn’t a budget tell me when my money is coming and going from the bank account?
I don’t mean to alarm you, but it’s important you know, there’s more than one kind of budget. I’ll make this clear in a moment.
If you’re not sure what a traditional budget looks like, or how to create a simple one, read this “How to Create a Simple Budget” and then come back.
A traditional budget shows you when sales will be generated and when you expect to incur expenses, not necessarily when you’ll receive or pay out cash for those sales/expenses.
Think about the last sale you made, did you receive the cash immediately? Maybe, but it probably wasn’t until the next month.
That means you’ll have a sale in this month, but you won’t receive the cash until next month. That’s a problem when you need to pay for expenses in the current month.
What if you put most of your expenses on your credit card? The expenses shown in this month wouldn’t be paid out of your bank account until next month. You probably can’t pay everything with a credit card though, things like rent and utilities usually need to be paid in cash directly out of your bank account.
So you can see how there’s a lot of situations where your cash movement doesn’t always line up with your income statement. Some expenses get paid this month, some next month, some cash is received from sales generated last month and some from this month. This is why it feels like sometimes your budget isn’t in sync with your business.
A cash budget
The solution is to create a cash budget.
I start by creating the budget I outlined in the other article. I create a copy so I can change things without messing with the original (it’s still useful).
In my business, I offer a monthly subscription service, so I know some of my revenue will be paid on the first of the month, I put that in to each month.
That’s cash I know I’ll receive every month.
Next I look at my expenses. Which items need to be paid in cash during the month? Rent, utilities, my coach’s fee – they all stay where they are because when I’m billed is when I have to pay cash for them.
I know many of my business purchases will go on my credit card, so that means on my cash budget, I’m actually paying for them in the following month when I pay the bill.
Go through each line of your budget moving the amounts around to when you know the cash will be coming in or going out of your bank account.
This is a simple cash budget and it will be far more useful in planning payments to suppliers and receipts from customers than the first budget was. It will help to ensure you have cash in the bank when you need it.
Remember, you’re going to have discrepancies between your budget and your actual cash movement, and that’s okay! If you have a big difference, make a note as to what happened so you have a reference for when you go to do your budget next year.
Like with anything it gets easier as you do it, so keep at it. Check back regularly and make sure you’re staying true to your intentions for the year, or you make a deliberate and thoughtful change.
If you’d like a hand with your budget I’d be happy to help you. You can fill out a contact form: https://www.kirkcpa.ca/contact