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Budgeting 101
Eliminating excess spending is the most critical component of any business plan. Often what sounds good at the moment and appears to be a sound business decision at the time will result in a shortage of cash later and poor operating results. Therefore it is critical to carefully review all expenditures in light of present business needs and long term cash flows. Many expenses appear initially appropriate, however when reviewed in the light of day and with an objective judicious mind we see that many of our expenditures were indeed based upon folly rather than prudence.
Planning Ahead
“The plans of the diligent lead to profit as surely as haste leads to poverty.” (Proverbs 21:5)
God’s word is self evident and clear for those who are insightful, thoughtful, and are not complacent about tomorrow will be those who will be successful. There is no such thing as luck, only divine providence. Though there will be times when God alone will steer you to your destination but God favors the prepared and those who are ready. Therefore it is up to each of us to prepare and plan for what might next be around the corner. Leaving our destiny to chance will result in poverty well below the favor that God prefers to reign down in our lives.
Delaying Gratification
Perhaps one of the most critical components of budgeting and economic survival is to delaying gratification until either the perceived need for an item is erased or it is deferred to such a time to which we can easily afford it. In our society we are constantly bombarded with consumerism teaching us that our wants are indeed our needs. Unless we are able to discern the difference between the two we are doomed to a paradoxical series of financial disasters. With credit so readily available we have to self discipline ourselves to avoid buying things that we clearly not afford. As a guideline to this it is suggested that you do not buy things you cannot afford to pay cash for in full at the time of purchase and to avoid buying anything on credit. Often we are swayed by a deal which appears to be too good to be true promising items such as no interest, however we should always be guarded to remember that “Creative financing means you probably can’t afford it.”
Seeking Counel
“Plans fail for lack of counsel, but with many advisers they succeed.” (Proverbs 15:22)
No one is expected to know it all. In fact, it is very difficult and takes all of energy time and effort to do one thing well. As we cannot all experts at everything we should often seek the advice of others. Seeking counsel does many things for us including the lifting of the fog and confusion surrounding a decision, shortens our time needed to make an appropriate decision, and it dramatically heightens and increases our chances of success. Though many things are clearly not out of our reach and understanding in making appropriate decisions, there are still strategic and perplexing issues that come our way for which we are not qualified. Though it is clear to all of us we would not perform medical procedures or surgeries on ourselves as a physicians skill and expertise are critical to our well being, it is often as critical to other areas of our business and life as well. Thus, it is essential for us to have a circle of trusted advisers to help us navigate through the many channels and options available to us.
Planning vs. Historical Accounting
Financial statements are often misused and abused. They are often ornately presented with accountant’s opinions ranging from audits to compilations. Often we even find a statement of cash flows and financial footnotes.
What do these statements tell us? Numbers and data when prettily presented often are an accountant’s representation of the financial status of an entity.
I believe that financial statements without narratives, analysis of trends, and a review of expenditures are nothing more than formal proof that the bank account has been reconciled and that everything balances. Data without thorough critique is useless.
A classic example is Good Times, Inc. (a fictional retail operation) whose accountant formally presented the results of the past month’s operation that indicated that the company just had its best sales month ever. Good Times, Inc. accordingly beefed up its sales force and administrative staff in order to handle the increased volume.
Unfortunately the financial statements alone failed to reflect several other critical areas of financial distress:
- The line of credit was tapped and no prior efforts had been made with the company’s bank to extend the line.
- Spending levels were at an all time high and the profit margins were slipping.
- Trade data suggested that the market’s profitability was moving from retail to wholesale.
Approximately, sixty days after the best month ever, the company’s increased spending, the additional personnel and the shift in the marketplace began eroding the company’s profitability picture. As the accountant had solely processed prior data and presented it as current month and year-to-date data, the trends, and changes in the margins and the company’s changing financial situation had been hopelessly lost in the numbers. Now the company was faced with downsizing and refocusing its marketing efforts away from wholesale and towards retail. Good Times, Inc. could have avoided and even planned for the downturn if they had analyzed their trends and compared their results to the available market data.
A company’s focus should always be on the marketplace and what it’s doing. It should not get caught up in admiring its own historical data. Careful attention should be paid to product lines and profitability and whether trends indicate a rise or fall. Companies should change their focus from historical review to short-term and strategic planning and should concentrate on how to maintain constant step with the marketplace.
Only in this way will Good Times, Inc. not be left behind. The marketplace is always changing and we owe it to our future to be ready to keep pace.
Just as we cannot change the past in life, so it is so in the world of accounting and taxes. By helping you look ahead we assist you in understanding the nuances and variables that are all a critical part of a business’s growth.
