ShareThisBy STEPHEN WINDHAUS
Tuesday, November 21, 2006
The Christmas season is near; retailers are at their busiest and, for most, it ushers in the conclusion of another tax year. Accountants and bookkeepers will be busy compiling financial statements and preparing for the tax season. However, one task many business owners give little or no attention to is the matter of budgeting for the new year.
Even if the year gone by has been good to you, it is advisable to be fiscally responsible. You may or may not be spending your money responsibly. Examine your expenses for the year. Make more sense of those expenses by comparing 2006 to previous years, and then analyze them before deciding on next year's budget.
COMPILE THE ANNUAL EXPENSE ACCOUNTS:
Compiling expense accounts is really not a difficult task. Unless you contract or employ bookkeeping and accounting services I do hope you are using some process, software or longhand, to monitor and sum up expenses. When filing income tax returns every business is compiling the IRS' version of a profit and loss statement.
Make note that one item does not show up on the profit and loss statement. The principal amount paid on company loans is not itemized. Only the interest paid will be listed, but it should not be hard to add up the principal paid.
Secondly, one expense item is not an actual distribution of money. I refer to the depreciation on the company's tangible assets. That line item reflects a dollar value of your cost to use the asset.
To better assess and analyze expenses, and to better prepare next year's budget, you should compile your expenses for the last three years or more. At the very least, consider the last two years in order to easily visualize trends on how the money has been spent.
ANALYZE THE EXPENSES:
Create a column for each year. Once you put together two to three years of expenses for each line item, note the changes from one year to the next. While you're at it, do the same with annual sales. Now consider the following:
1. Costs (expenses) of sales _ Are all of those expenses directly related to sales? They should be. Do they rise with sales and do they represent the same percent of sales from one year to the next? If they represent a greater percent of sales when sales rise, then this needs to be investigated.
2. Operating Expenses - These are expenses you incur whether or not sales are being made. If a particular expense line item is rising then ask yourself why. Increases in staffing, and insurance and office supplies, for example, are expected in a growing company. Rising fuel costs are to be expected in all companies given the recent economy. However, rising costs that can't be justified by economic conditions or expansion need to be reviewed.
3. New Expense Items - Companies experiencing growth are bound to incur new types of expenses. For example, creating a Web site, hiring the first employee or sponsoring a local sports league team can be expected at companies that are trying to increase awareness, find new clients or other activities associated with growth.
You must be very careful to infer that the new expense will result in increased sales. Likewise, you can reduce expenses in one category while introducing a new expense. For example, introduction of a Web site can reduce expenses of business cards and brochures.
Following this procedure, especially for the first time, is exciting and will likely reveal things you did not know about your expenses. Likewise, it can create the opportunity to better spend your money and increase net profit.
(Stephen Windhaus is a small business consultant based in Florida. You can contact him at steve(at)windhaus.com. More information and resources about small business and business planning can be viewed at www.windhaus.com. For more news and information visit www.scrippsnews.com.)
