Welcome to the second installment of the income and expenses planning series. If you missed Part 1 on income, you can read it right here.
Expenses. They are a necessary part of the business – remember that old adage – you have to spend money to make money. That may be true, however, you need to plan and forecast your expenses accordingly, and know when to increase and when to decrease spending.
I’m sharing my best tips below, so let’s get going.
Forecast the Salaries for your employees (include increases where planned and bonuses), Benefits for your employees (including health insurance, workers compensation insurance, disability insurance, 401K or other retirement plan benefit), Payroll taxes for your employees.
For your contractors, forecast your payments to those contractors, based on the anticipated hours worked, rate per hour, or monthly rate – it all depends on the agreement that you have.
Forecast the cost of hiring the workers, including advertising and recruiting fees.
If you are forecasting an increase in your team, get these expenses into your forecast now, even if it’s months away. It helps to run the numbers early, so no surprises come your way when it’s a slow month. The worst-case scenario is you aren’t able to pay someone. That should never happen with forecasting.
A business may have the exclusive use of a vehicle – such as a landscaper or a painter. Be sure to forecast the expected fuel cost, insurance, maintenance for the vehicle (vehicle fuel, insurance and maintenance should only be forecast if you take the actual method for vehicle expenses), tolls and parking.
A business may have Professional Liability insurance, Errors and Omission Insurance, Property Insurance (if you have a physical location), Cyber Insurance (especially considering the hacking that happened recently), Product Liability insurance, Home-based Business insurance, Business Interruption insurance.
These are easy to forecast because they don’t change that much year to year. And if they do, get the updates into the forecast immediately. This is also a great way to make sure you don’t pay for something you no longer need, like a membership to a group, or a networking event you no longer attend. Also, it is good to reflect while doing the forecast – are you getting a decent Return On Investment (ROI) for these networking organizations? It is easy for these monthly and yearly fees to keep charging your credit card and seeing them all in one place makes it easy to see what needs to stay and what needs to go at year-end.
There are multiple online types of software subscriptions that a company uses – CRM, accounting, project management, email blast. Similar to networking, these are easy to forecast because they don’t change. And if they do, get the updates into the document immediately. This is also a great way to make sure you don’t pay for something you no longer need, like a software subscription for a fax system.
Then, there are the more professional, larger software subscription items for businesses. Be sure to include the expense for these items in the forecast – which may only be charged once a year or potentially every other year.
Often, when one attends a conference, the business pays to be a vendor sponsor at an exhibit hall or to be on the stage speaking to the attendees. This can be quite expensive and often will be spent over multiple months or in one large payment. Be sure to forecast this expense – even over two years if necessary.
This category of expenses is for the lawyers and the accountants. Be sure to forecast these expenses, to be sure you have these costs covered and planned.
Look for deals! Pre-pay and plan early. Know and forecast if expenses are charged immediately (such as airfare and Airbnb) or at actual travel time (such as a hotel). If your trip corresponds with a slower month in the business, make sure funds are allocated to cover that down time. If you know in advance you need it, you’re better prepared to make it.
When you complete the forecasting of the business expenses and compare that to the income forecast – is the business profitable?? That is the major question. If the business is profitable – GREAT – however, do not forget about the tax situation (and be sure to plan for Federal and state taxes). If the business is NOT profitable (the forecasted expenses for the period are more than the forecasted income), then there are only two ways to change it to be profitable – increase income or decrease expenses. That may be easier said than done, however, once you have the information, it is up to you as the business owner to make the changes.
If you need help, I’m here to chat. Schedule a complimentary session with me right here.
Did you know I hold a monthly workshop at Headroom? It would be great to see you there. I cover juicy financial topics every month like budgeting, expenses, taxes and a lot more. To see all topics for the year, click the button below.
