Our clients know they need to create a budget, but actually doing so can be very difficult - even painful - for them.
Most business owners would happily delegate the onerous task of budgeting to their accountant or bookkeeper as they are uniquely positioned to help create sound budgets. We are familiar enough with our clients’ businesses to help identify areas where they are being unreasonable with their projections and detached enough to see their blind spots.
However, if our clients are to adhere to their budgets, they must be involved in the process. We may not be able to convince our clients creating a budget is actually enjoyable, but we can help make the process much less painless for them.
The “Budgeting is Painful” Mindset
Many business owners think of budgeting in negative terms. It’s going to be hard. They might have to give up some things they want or have convinced themselves they need. Maybe they feel fear about being able to stick to a budget, or maybe their fear is they will stick to it for a while, and then relapse.
Unfortunately, many business owners approach budgeting with the same mindset as people trying to lose weight approach dieting. Many years ago, my doctor explained to me why diets don’t work. By their very nature, diets are meant to be temporary.
We change our behaviors for a short period of time, but then we fall back into old habits. The key to successful and permanent weight loss, he said, was to view a healthy diet as a lifestyle. We can use this same mindset shift to help our clients embrace budgeting.
Part of what makes budgeting so painful for many business owners is the traditional top to bottom approach to budgeting. In this approach, the business owner estimates what they think their income will be, and then they allocate that income amount to their various expenses. With any luck, there is money left over after they have filled in all the blanks on their expenses worksheet.
There is an inherent problem with this approach, though. Most business owners are overly optimistic about their projected income and overly conservative with their estimated expenses.
By the time they reassess their budget in light of their actual income, they have often incurred debt by spending money they didn’t actually have. This, combined with expenses that turn out to be higher than the amounts they allocated, results in the client’s discouragement and the belief that they just can’t stick to a budget.
Sometimes the business owner knows they are facing a decrease in income, and they are faced with the unpleasant task of determining which expenses to cut. This puts the business owner in “crisis mode.”
Crisis mode is not only painful, but it often leads the business owner to target the wrong expenses for elimination. Instead of approaching their expenses with a scalpel to surgically remove the ones which are causing the most harm, they approach them with a hatchet and eliminate seemingly large expenses which might actually be saving the business money in the long run.
Budgeting backwards, or reverse engineering, a budget is a much more realistic and painless way for most business owners to budget. It eliminates much of the guesswork of budgeting, because the process begins with a review and analysis of the business’ expenses. During this process, we can often help our clients identify cash leaks in their businesses, and we can also identify areas where they can increase efficiencies.
Once we have added up all the historic expenses and eliminated the unnecessary and harmful spending, we can determine the income necessary to cover the expenses. At this point, we can help our clients develop an income targeting plan to cover their expenses and, better yet, actually plan for profitability.
Changing the Budget Mindset
Reverse engineering a budget helps business owners change their budget mindset. The purpose of a budget is to grow a healthy business, not to “punish” the business, the business owner, or their staff for “poor” sales performance. The top down approach to budgeting tends to lead to a mindset of deprivation and punishment, whereas the budgeting backwards approach focuses on improving the business’ finances in light of where they currently stand.
A budget should not make a business owner feel deprived, nor should it overwhelm them from the outset. Yes, they will have to be reasonable about their spending. However, by reverse engineering their budget, they can more easily see what they need to do to attain lasting fiscal health and profitability.
Helping with this mindset shift is just one more way accountants and bookkeepers can move into the role of the favorite trusted advisor.
Billie Anne Grigg has been a bookkeeper since before the turn of the century (this one, despite what her children think). She is a QuickBooks Online ProAdvisor, LivePlan Expert Advisor, and a Mastery Level Certified Profit First Professionals. She is also a guide (coach) for the Profit First Professionals organization. Billie Anne started...