Blair Morrison, CEO

Budgeting Breakdown from AutoCFO CEO

After you Re-Organizing and Re-Labeling Your Financials, it is time to set up your budget! 

First, let’s talk about the theory of budgeting. 

Why budget? Think about any big goal you’ve achieved in life. Whether your goal was strength training or planning a big trip, my bet is you have always been more successful when you had a plan. Your business should have a plan too. If you spend all of the money you receive from customers on a big marketing campaign to bring in new business, but don’t set aside money for rent or payroll, you may be out of business before you can provide the services advertised in your campaign. 

The goal of a budget is to allocate your income in a way that keeps you in business to fight another day, and allows you to set aside some of that income for a rainy day or big one-time costs like unexpected taxes or rent adjustments.

When I start building a budget I always start with cost of goods sold. 

What are cost of goods sold? Whenever I need a good definition for a financial term, I always look to Investopedia – Cost of goods sold

Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a company. This amount includes the cost of the materials and labor directly used to create the good. It excludes indirect expenses such as distribution costs and sales force costs.

Once you determine your cost of goods sold, you know how much money you have to spend on the operating expenses of your business.

An operating expense is an expense a business incurs through its normal business operations. Often abbreviated as OPEX, operating expenses include rent, equipment, inventory costs, marketing, payroll, insurance, step costs, and funds allocated for research and development.

Once COGS and OPEX are accounted for, you can add in discretionary expenses like employee morale outings and Taco Fridays. Maybe we should go out for a few drinks at happy hour rather than a half day at Topgolf this year. BUT if we land that big client, Topgolf it is! 

A budget isn’t necessarily about tightening your belt and spending less (though if you are having cash flow issues it can be).  Often it is more about knowing how much you plan to spend in an area so you don’t spend more than you intended. Then when your office manager asks what to buy for snacks for the office, you can give them a dollar budget for each month, keeping expenses in line. If they spend everything for the year in the first month, no more snacks for the office. Allocating costs upfront allows you to free up some money for other things. 

You can also use a budget to determine where you would rather spend money. If you can lower a fixed expense like rent, what else could you do with that money? Invest in a new product line? Raise salaries for a few key employees you want to retain or reward? Put aside some money to open a 401k plan for yourself and your employees? 

Budgeting is about spending a few hours once a year to decide what is important to make your business successful. What you choose to spend money on defines your business. A budget helps you outline fixed versus variable expenses and allows you to think about what is important to the success of your business. 

For example, is this the year you’re going to re-do your website to attract better clientele? Since it will take time to bring in those new clients, assume you have the same income as last year and determine what other variable expenses you can reduce to set up a budget that allows you to comfortably make that investment.

Automated Budgeting

When you sync your accounting data with AutoCFO, we auto-generate a budget for you. Essentially, your done-for-you budget is waiting for you 10 minutes in your future! If you’re not yet an AutoCFO client, click here to start your 30-Day Free trial. If you’re already a client, log in to start customizing your budget now!