A budget is one of the most basic devices to measure the health of current operations. A sound budget can provide early warning that you may be headed toward a cash flow shortage, or it can also help you answer questions about where you might find the extra money to build that new arena.
Here are some tips to get started and to sustain the process. In addition, at the end of the article we provide some great financial planning tips.
At the Starting Gate
The first step in creating a budget is to identify all your sources of income and each one of the regular bills that you need to pay to keep your business running. On the expense side of the equation, these are your fixed costs – they are going to need to be paid regardless of your income. The next step is to categorize each one to the level of detail necessary to be able to effectively manage your business. That is important: a detailed and well thought out system of categorization will give you the flexibility later to look at your business from different points of view. Doing so will allow you to pinpoint the source of a problem.
Variable expenses change with the volume of business you do in a period. These need to be included in your budget as well; they will be based on your estimations that you make when you do your business forecasting.
Don’t forget to build a contingency fund into your budget. The concept of budgeting sounds well and good for an operation that runs on a predictable track. Many horse business owners will say, however, that chaos is the norm and they have become expert firefighters in order to survive. Tractors break down, stalls need repair, and the vet makes emergency visits to your stable. It may seem like the unexpected is status quo, but if you take a step back you are likely to see a pattern to the expenditures. Once your true spending requirements are identified the exceptional, outlying sums will stand out more readily. You can then make an informed budget allocation for contingencies.
Down the Stretch
Your budget will probably need revisions and refinements for some time. You need to feel comfortable that you have a plan that can sustain your operation, allow you to meet your business goals, and follow through on your overall plan. As you move through the time frame that your budget covers you will be able to identify projects that are running over budget and draining resources from other efforts. You can then make decisions about how to adjust your budget and/or your spending behavior.
Early detection of a resource drain gives you the opportunity to address the issue before it has an impact on other parts of your business.
The Finish Line
Actually, budgeting is an ongoing process, so the “finish line” is a periodic cutoff that you establish for your own performance review. You may undertake your budgeting review at the end of a fiscal year or upon completion of a project. Interim comparisons of your budget to your business plan are important to catch the warning signs and the affirmations that a budget will provide.
Look for measures of success that maintaining a budget has on your control over your business. Be cognizant of times that you make a decision based on the impact that the decision will have on your budget. That could mean deciding to squeeze one more year of use out of your trailer or saying yes to expanding your lesson program.
Don’t forget to celebrate the little successes as well, like going six months without a cash flow crisis. That’s a half year without having to rob Peter to pay Paul – a very positive result of effective budgeting!
Fail to Plan and You Can Plan to Fail
Breeding farms give careful consideration when planning which mares to put in foal each season. Show barns take into account a variety of factors as they plan their event attendance schedule every year. The stable manager’s responsibility for financial planning is every bit as important. The creation and execution of a budget that accounts for both expected and unexpected costs, as well as a measure of emergency reserve, could make the difference between ringing up your credit card and making a stress-free cash payment on an unwelcome rainy day.
Staying with the analogies of a breeding farm and a show barn, the breeder and trainer have to consider what resources are available at the time planning is done—mare/stud combinations or shows within a reasonable distance that will hold classes appropriate for current clients. The stable manager similarly must consider the short and long term goals set for the business, local buying and selling market conditions, and projected revenue and expense schedules when planning the stable’s annual budget. Many professional financial advisors suggest including a recurring account payable entry for the business itself. By including the business in the regular payment schedule along with all the other bills you can be sure that some portion of what you bring in gets set aside. If you are diligent in your payments to yourself and avoid dipping into those funds, you will find that the balance will become substantial before you know it. When you really need the money—really need it—it will be ready for action with no strings attached.
Some useful tips that go along with saving as part of your budget:
• Pay yourself first. If your business is the first one paid each month you will be sure that your allocation is always satisfied. In the lean months you may need to resort to some old juggling tricks to pay the bills that compete for last accounts paid. Stick to your plan and treat your business as you would any other top priority.
• Make the money you pay yourself difficult to access. Keep the funds in an account that is in no way tied to your checking account. Without checks or an ATM/credit card you will be less tempted to spend from the account unnecessarily. Take the notion of difficult accessibility a step farther by sending the money to an account in a bank other than the one where you do your checking. Electronic transfers are a wonderful convenience, but that is something you are trying to avoid here.
• Write out rules for yourself, your staff, and your accountant that define situations that would call for the use of funds in the account. Any scenario that does not meet the criteria you describe must be dealt with by other means.
• With the foresight that comes with thoughtful planning you might consider dividing your payment to yourself into multiple accounts, each with a distinct intended use. (It is a good idea to document a purpose for each account to help keep things straight.) This is not unlike newlyweds dividing up their paycheck into envelopes destined for each utility. The important point here is to remember to always fill your “personal savings” envelope first with your pre-determined amount.
• Unexpected expenses crop up in every business. As a manager your ability to handle them in stride depends on your budgeting skill and your determination to stick to your plan.