This Spring my daughter graduated from Grove City College, got her first car, and her first job. As a new member of the workforce, and as a new car owner, we took some time to work on her budget. After all, it’s only a matter of time before she’ll need to have a radiator replaced, or engine work done. And if she’s not saving up for those expenses now, she will face a minor financial crisis later.
When I consult on the various facets of running a creative practice, part of my process is to look at basic things like operating budgets. A sound budget must contemplate infrequent, yet certain occasional future expenses.
It’s the Infrequent Expenses That Surprise Us
Just like a personal budget, a business will face various expenses that occur just once per year, or less frequently—but come they will. Annual software licenses, insurance premiums, and year-end bonuses all require you to set money aside as a normal part of your monthly budget—so the cash will be there when you need it.
Some additional line items in my monthly budget include: computer repair and replacement, legal consultations, marketing expenses (travel, lodging, conference fees), professional development, quarterly and annual taxes, annual accountant fees, liability and workman’s comp insurance premiums, and a general savings category for a rainy day.
Planning for The Costs of Revenue Capture
But there are other kinds of occasional future expenses that are often missing from a company budget—those relating to increases in revenue. And these can be the most perplexing and difficult to manage. It feels great when we land a big new project, that infuses a trove of revenue into our cash flow. But if you don’t also add the corresponding costs involved in capturing that revenue alongside it, your elevated expectations will be dashed when you fall into a hole of negative cash flow.
Increased production and resource costs that come along with new work are often a huge hole in an operating budget. And if you don’t plug it, you may fall into a trap cleverly disguised as an opportunity.
Projections That Anticipate Staffing Increases
Therefore, your budget needs to be projected out into the foreseeable future by converting it into a cash flow worksheet. And this worksheet needs to align your revenue projections with the corresponding expenses you’ll occur as you earn that revenue.
In my cash flow worksheet I have two extra tabs, in addition to the main revenue projection tab, and the expenses tab. One is for employee expenses, and the other for contractors. The total expenses of these two worksheets are summarized in my main expenses sheet. So, if I win a big new project, after I add in the revenue I’ll receive, I then go to the contractor tabs and I add in the anticipated costs for these extra resource I’ll need to get the project done—or if I need to add staff, I’ll add in the costs of that hire.
Only then is the real net gain (or loss!) from the revenue reflected in my cash flow. If you don’t flesh these details out, if you ignore the cost of revenue capture, you are digging a hole that you will fall into down the road. It’s like driving an aging car with lots of miles, and not saving for that inevitable costly transmission, or to replace it altogether.
Resources for Budgeting and Cash Flow
If you need some help getting your budget and cash flow in order, check out some of my resources which include a Google Cash Flow Worksheet template and a couple of training videos for managing cash flow.
Don’t let occasional and variable expenses take you by surprise. Build them into your budget from the beginning, and set money aside for such eventualities. You’ll operate with so much more confidence and security when you know that you’ve covered all your bases!