The number 1 reason clients approach me is to help them understand their financial position. The number 1 reason we have been successful in assisting them in this process is putting together a simple and manageable budget.
So the focus of this blog is to get back to basics – budgeting 101. Here’s some thoughts:
1. Put it down on paper
It’s easy to be swayed by not going after that dream because we know, in our head, we don’t have the money. More seriously, it’s even easier to believe there is no debt if it’s not written down because if it’s not written down, it doesn’t exist! One of my basic beliefs is that we can’t find a solution if we don’t fully understand the problem. In fact, the main premise of having a finance function or working with an accountant is he/she will provide all the possible information in an accurate, objective fashion so decisions can be made.
When I start working with a client, be it with a person or company, the first item I request is their budget for the next 12 months. If they don’t have one (which has been my experience), then the next step is to create one. Or one last point on this, while I say put it down on paper, I really mean, put it on Excel or something similar :-)
2. Keep it simple
While there are complicated forms and templates available, keep it simple. Split by month over a 12-month period and using a cash basis, start with expenses. Split your Interest Bearing Mandatory Debt (i.e. credit card, finance debt, loans) from other expenses. Then, list out living expenses, so rent, telephone, rates, electricity, food. List discretionary spend, i.e. holidays, yoga classes, coffee/lunches. Then, list any debt that is being paid on a voluntary basis, where there is no interest (i.e. loans from family & friends). Sum up this these expenses. WARNING: This may cause some people to go into hyper-ventilation so tread carefully!
Then list income. Split between established/regular income. This should be after taxes. List any other adhoc sources (interest on investments). Sum up the income.
Establish a net position, i.e. Total Income Less Total Expenses = Net Position
3. Review and ponder
Stand back and now analyse the information. Listing what the net position allows you re-evaluate decisions. That holiday in France may be affordable, but looking at local vacation spots may give the option of paying back some debt sooner and being in a position to start your own business or buying that new car. The opportunity exists to revaluate the discretionary spend. When you see the total year spend on coffee or bought lunches, it could lead to changing behaviour that brings you closer to the long-term goals, or even the short term ones.
The simple act of putting everything on “paper” allows you to “SEE” the spend and this impact should never be underestimated. Work with a professional, whether your accountant or business coach, in understanding what the numbers mean and how you can improve the situation for the better!
4. Rookie Mistakes:
Firstly, don’t assume you can live on $10 a week for discretionary spend. Budgets are about being realistic and should reflect normal living. If there are cuts you want to make, do it gradually and change 1 behaviour at a time. You are more likely to be successfully. Secondly, my dad always told me that when you get paid, always “pay” yourself first! What he meant, is invest in yourself or simple put, save! Around the 7th week of working with clients, I always introduce this line item into the budget – after Net Position, we incorporate the Savings section and this is usually 10% of net income. That’s another point – the budget is not a document you put all this work into, and never look at again. It is a living document that should be plastered everywhere! As you learn from your spending and saving behaviours, it should be updated. Keep old versions as it’s incredibly insightful to compare actual to budget. Finally, round up your numbers to the nearest $100 and put in a format that is clear to read! I normally use line fill colours to highlight main line items, with size 16 font and freeze panes on the month rows/details columns.
Someone wise once said, “you can’t change what you don’t acknowledge” Get the numbers written down and see the whole picture. While you should heed the warning in point 2, once the shock wears off, there is an exhilarating and intoxicating feeling of a way forward. Don’t let your fear rob you of this feeling and pursuing your dreams!
P.S. if you would like any assistance or a working template, send me a message via www.bizsync.co.nz .
Prenelle Rungan – 25 May 2016
Prenelle is a fully qualified CA and lawyer. She has held senior finance roles with global and local companies over the last 15 years. She is currently a Director of BizSync Limited, a consulting company that strives to start businesses on the right foundations. To contact her, please follow this website link www.bizsync.co.nz/contact.