Budgets Are Not Perfect

It is inevitable that unplanned expenditures will come up when managing your business budgets. There is no such thing as a perfect plan. Budgets are just a financial projection on what is anticipated. Your skill comes into play when you have to adjust for the unexpected.

When reviewing unexpected spending decisions first consider how your finances are performing compared to plan. You should do a quick mental checklist:

    What’s the status of cash reserves,

    Is Revenue up are down,

    Is expense up or down.

    Ultimately the question is “How will the decision impact Cash or net income.”

    Note: Revenue minus Expense equals Net Income (Rev – Exp = N.I.)

Furthermore, when making a spending decision ask yourself is this a Expense or Capital Item. Expense items impact the income statement and Capital items impact the balance sheet. In ether case they have an impact on the business’ Cash Flow (CF).

Capital comes in different flavors Plant/Building, Property or Equipment (PPE), Special Bonuses or changes to cash reserves. If CF’s trend is neutral or down they it is a decision on how to adjust capital spending in order to address the new expenditure. If CF is up then it’s just a decision to relocated the increase to the best available use.

Whenever a spending decision is made it’s never a simple yes or no. You should perform a quick mental checklist before reacting and when possible validate your potential course of action by reviewing the details.