Along with the revenue forecast, you need to plan and manage spending. Revenue is money coming in, and spending is money going out.
By the way, the word budget, as I use it here, is exactly the same as forecast. The difference between the two is just custom. I could just as easily refer to revenue and spending budgets, or revenue and spending forecasts, as revenue forecast and spending budget.
Most people think of them the way I’m using them here, using the term forecast for revenue and budget for spending.
There are several ways to spend money in the normal course of business. These are the things you write checks for.
- The first is costs, direct costs, what you spend on what you sell. LivePlan puts those in the Sales Forecast (where they belong). You saw them in the previous section, covering the sales forecast.
- The second is normal expenses, also called operating expenses, such as rent, utilities, advertising, and payroll. LivePlan handles these very well in its Budget feature, which I’ll show you in this chapter.
- The third is buying assets, such as vehicles, equipment, buildings, furniture, and so forth. The business dictionary (businessdictionary.com) defines assets as “Something valuable that an entity owns, benefits from, or has use of, in generating income.” LivePlan also handles these in its budget feature, so I’ll show you these in this section as well.
- The fourth is what you spend to repay debts. The interest you pay on debts is an expense, and is deductible, and impacts your profit and loss. When you have interest expenses, LivePlan includes those automatically as expenses. However, the money you spend to repay those debts, what we call the principal, is not deductible, does not affect profit and loss, but still costs money; so it affects your cash flow. LivePlan handles loans and interest in a separate area, which I’ll show you in a following section.
The LivePlan Budget Functions
The illustration here shows how LivePlan guides you through its four main categories of spending, which includes expenses, major purchase, purchase of other (meaning not major) assets, and taxes.
Let’s look first at the most common kind of spending, the operating expenses. LivePlan gives you guided input of all major operating expenses, in as much detail as you care to plan. You set the expense categories as you like them, at a level of detail you’ll be able to use. If at all possible, set your expenses in LivePlan to match the categories you use for your accounting and reporting. This will give you an enormous benefit later, as you use the plan to run the business, because as long as you use one of the several major small business accounting software packages, LivePlan will be able to connect your plan to your accounting and give you automatic plan vs. actual charts whenever you want. This is great for regular review and revisions.
All the numbers are educated guesses. Garrett, the bicycle storeowner, knows his business. As he develops his first lean plan he has a good idea of what he pays for rent, marketing expenses, leased equipment, and so on. And if you don’t know these numbers, for your business, find out. If you don’t know rents, talk to a broker, see some locations, and estimate what you’ll end up paying. Do the same for utilities, insurance, and leased equipment: Make a good list, call people, and take a good educated guess.
The illustration here shows how LivePlan manages the estimated expenses. Please notice the “Edit” link for each of the categories.
This next illustration shows what happens when you click on a category to edit the estimates month-by-month and year-by-year. These are the marketing expenses. Garrett chooses to estimate expenses as varying amounts for each period, rather than as a standard amount every month, one-time expense, or percent of revenue. For your case, choose which pattern seems most practical.
Payroll and Payroll Taxes are Operating Expenses
LivePlan gives Payroll, or wages and salaries, or compensation, a list of their own. Payroll is a serious fixed cost and an obligation. Garrett’s LivePlan handling of Payroll includes estimated gross salary, as shown (in part) in this illustration.
LivePlan also includes a simple calculation for payroll taxes, which applies a percentage over and above payroll expenses. Garrett estimates 25% for this, as shown in this illustration:
Notice that LivePlan includes the totals from the Personnel Plan in the tables it generates for the expense budget. And if you look closely (it may take a calculator) at the expense row “Employee Related Expenses” and compare that amount to the total payroll, you’ll see that it’s the same estimated 25 percent of payroll. LivePlan does this for you automatically.
LivePlan has a simple feature for managing the amount and timing of major purchases such as land, plant or facilities, major equipment, vehicles, and so forth. In the illustration that follows here, the bicycle storeowner plans to purchase an outside portable building which will house a new repair and maintenance facility on the back lot contiguous to the store parking.
Major purchases are not expenses. They are assets. This is a matter of standard accounting and finance, something that isn’t intuitive for all, but is dictated by tax code and what we call GAAP (for Generally Accepted Accounting Principles). Of course writing a check to buy an asset feels to you, the business owner, very much the same as writing a check to pay an expense. However, purchasing assets is not tax deductible and does not affect the formal Profit and Loss of the company. Since we have to live with the standard accounting on this point, LivePlan handles this correctly. These major purchases do affect cash flow, but they do not show up on Profit and Loss. They do affect the financial position of the company, so of course you estimate the amounts carefully, and include that in plan vs. actual tracking later on. LivePlan includes it as well, in the Scoreboard feature that tracks plan vs. actual by connecting to your accounting.
Not all asset purchases are major purchases. Not all asset purchases are easy to predict ahead of time. Simplifying assumptions are very useful in planning, so LivePlan has an option for planning on money for regular purchase of current assets without having to set each one apart as a major purchase. It is a very simple guided input, a matter of typing in assumptions. Just click the “Add a Current Asset” as shown in this next illustration, and then type your assumptions when the input comes up. LivePlan will guide you through the input, and automatically track the related spending and accounting and cash flow.
Spending Budget Summary
The illustration below shows the bicycle store spending budget as LivePlan shows it in the plan. It includes operating expenses and major purchases. It doesn’t include depreciation expense (which doesn’t cost you any money) or loan repayment (which does); but don’t worry – LivePlan keeps track of those for you where you need it, in Projected Cash Flow and Projected Balance Sheet and Projected Profit and Loss.
Interest and Debt Repayment
As I noted in the introduction to this chapter, LivePlan collects information on debts, including interest rates and repayment schedules, so it can include debt implications in its management of cash flow. Fill in the information here and LivePlan will automatically calculate principle repayments and interest expenses.
As you can see in the above illustration, LivePlan guides you through inputs of existing loans, if you have them (with starting balances, as shown in our next subsection); or estimating the timing of new loans. LivePlan does calculations in the background to estimate the details of principle repayment and interest that affect cash flow and the rest of the financial projections.