Episode 91: How to Avoid a Budget Sneak Attack

Does your company’s operating budget adequately anticipate infrequent future expenses? We can easily plan a budget based on our known monthly expenses, but are we prepared when an expensive annual software license comes due? Or, what if you had to hire a lawyer to help with a complex contract, or worse, to help resolve a serious dispute with a client (hopefully that never happens to you!). Do you regularly set aside revenue to cover unanticipated future expenses? If not, you might end up facing a budget crunch that can crush your business.

Are you ready to take the struggle out of finding new clients?

When I was running my first company, it grew very quickly. So much so that I kept reinvesting profits back into growth. This kept my taxes fairly low. Then we had a big downturn after the dot com bubble burst followed by 9-11. We barely survived that season, and so taxes were a moot point—that’s at least one upside to taking on debt rather than earning profits.

But things turned around quickly. We recovered and started growing rapidly again in just one year. That was a huge relief, except for the fact that I did not foresee the massive impact that would have on my taxes. That following April I had to come up with tens of thousands of dollars to pay the taxes on my gains. Now I’ve learned to anticipate taxes and set aside revenue to meet that need. But in addition to saving for taxes, there are a number of potential, infrequent future expenses you need to consider, if you’re going to avoid a budget crisis.

Taxes may be among the biggest unanticipated expenses, but there are many others, which when they gang up on you, can cause serious cash flow problems. Infrequent expenses such as: computer repairs and replacements, legal consultations, marketing expenses (like travel, lodging, and conference fees), professional development, accountant fees, and liability and workman’s comp insurance premiums all hit us rarely enough that they can take us by surprise.

But there is yet another, entirely different area of unanticipated expenses that can cause even bigger budget problems. That is, the costs associated with revenue capture. We don’t tend to think about winning new clients and projects as a liability. All we think about is the contract fee we’re looking forward to, and perhaps that fat 50% deposit that’s about to hit our bank account. But while getting new work is great, it’s getting the work done that counts. And in order to get that work done you must spend money. You’ll be spending your own time which has certain hard costs associated with it, or you might need to staff up, and bring on contractors to help get the work done. And all those costs need to be planned for and set alongside that revenue you’re looking forward to. Until you plan out both the revenue intake, and the associated costs to capture that revenue, you can’t know how much profit, if any, you really have to look forward to.

And so your budget needs to include the variable increases in production resource costs associated with new business. That’s why I always recommend that creatives maintain a cash flow spreadsheet that adds the dimension of time along with their overall budget. Only a running tally of revenue and expenses, aligned over time, will provide the proper planning tools you need to ensure that you don’t hit a serious budget crisis.

Failure to anticipate these problems is the reason why so many creatives, as they start to gain traction and grow, end up experiencing more volume of work and revenue, yet face increasing cash flow pressures as a result.

If you need better planning tools, to avoid a future budget crisis, check out my cash flow resources at holter.com/cashflow. You’ll find a sample cash flow Google spreadsheet template as well as a couple of training videos that will help you effectively use these important business management tools.

And of course, when you have these tools, you’ll also want to review and rework your overall operating budget so that you start setting aside savings for these inevitable, yet infrequent expenses, so that you’re ready when a budget sneak attack occurs.

Until next week: don’t let the business of creativity overwhelm your creative business.