Make an Expense Budget You Can Use to Manage Better
Most of us hate the word “budget”, no matter how valid the reason for having one! Budgets
are about as popular as diets are — they can both seem to be nothing more than a list of all
the things you want but can’t have! Whether you’re talking calories or cash, it’s not much
fun to sit down, roll up your sleeves, and look at a sheet of paper that’s going to tell you
what you can’t have in the next several months in order to achieve a long-term goal.
Think of budgets as management tools
But does it have to be that way? Not if you think in terms of a budget being a tool.
It’s a useful item. Valuable information. And best of all, it’s not cast in stone. It’s an educated
guess. It’s a tool, not a pronouncement.
After decades of business planning, I use the words “budget” and “forecast” as the same
thing. And I’m not alone: the difference between them seems to be custom. I could refer to
revenue and spending budgets…or revenue forecast and spending budget. Most
businesspeople will use the term “forecast” for revenue and “budget” for spending, so that’s
what we’ll go with here.
Navigating the Numbers
Normal businesses have three kinds of spending that they budget5

Direct costs are what you spend on what you sell. You estimate those in your sales
forecast.

Operating expenses are such things as rent, utilities, advertising, and payroll.

Other spending is money you use to repay debts, purchase assets, and distribute
profits. They don’t reduce your profits, but they do reduce your bank balance.
Costs vs Expenses
While both of them reduce your profits and taxable income, in finance and accounting there
is a significant difference between “costs” and “expenses.” Costs are direct costs, also called
COGS for cost of goods sold, or unit costs. They usually go in the sales forecast. They affect
your Gross Margin, which is supposed to be sales less costs. Industry profiles often
establish standard gross margin rates for comparison and analysis. Expenses are
technically operating expenses, like rent, advertising, and payroll.
Interest expense vs. debt repayment
Be sure you understand the distinction between debt repayment and interest expense.
They may sound like the same thing; they’re not. Interest is an expense, and shows up in
profit and loss. Debt repayment is not an expense, and happens without affecting profit and
loss one way or another.
The Expense Budget
Just as you did for sales forecast and direct costs, always plan expenses in the same
categories you have in your chart of accounts. For example, if your accounting divides
marketing expenses into personnel, advertising, and PR, don’t then set up marketing
expenses in your business plan as print, online, and social media. Keep the “labels”
consistent so you know what you’re talking about!
Predicting Operating Expenses
Forecasting your operating expenses is a matter of experience, educated guessing, a bit of
research, and common sense. First off: if you’re not sure about the numbers that would
pertain to such things as rent, utilities, insurance, leased equipment, and the like, check
with experts. For your overhead in terms of rent, talk to brokers, look around, see what
kinds of properties would serve your purposes, and get an idea what they cost. Do the same
for the other categories: make a good list, call people, consult some solid authorities…and
then formulate your best educated guess.
Payroll, payroll taxes, employee health insurance, benefits, and other compensations are
operating expenses, too — and they deserve special attention. Some businesspeople
separate these out on their own for projection purposes. You can break them out into
separate line items, or you can group them under a blanket heading such as “Personnel
Expenses”; either way, they’re a serious obligation and need to be carefully planned for.
Covering the Ubiquitous “Other”
One of the tricks of cash flow is recognizing spending that doesn’t affect profits. These are
things that cost you money but are neither costs nor expenses.

Paying off a loan, for example; it takes money out of the business, but it’s neither
classifiable as a sales projection, a cost, or an operating expense.

If your business is based on selling products, the money you spend on inventory also
doesn’t show up in P/L until you sell it.

Purchase a company car or equipment? Those things still take money…but they’re not
tax deductible, and they’re not an expense. How does that work?
The win is the management that follows
First, you do your budgets (or forecasts) right:

Aim for the right combination of summary and aggregation. This means you don’t have
to have every single line item in this working plan, but you do need to cover your major
categories.

Link amounts to concrete activities and tasks.

Make it a collaborative affair: while you’re linking amounts to tasks and specific
activities, don’t forget to include the people responsible for them.
Then you manage them regularly
Budgeting and forecasting are useless without the management they are supposed to
generate. Make sure you schedule a monthly management meeting for budget review,
adjustment, and discussion. Take a look at the forecasts, the expectations, and the plans,
versus the actual sales, the execution, and the results. From there, draw further plans,
make your tweaks, and go forward: that’s what managing a business is about.
Do that right, every month, and you’ll have better management and more accountability.