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June 16, 2021

Financial Acumen Series Part 1 Recap: Budgeting

The Alliance of Women in WC understands that one of the main reasons women are not promoted is the perception or an actual lack of financial acumen. To combat this issue, we hosted a series of webinars with Nicole Sauk, Chief Financial Officer at Ametros and Boston Ambassador of the Alliance, to educate on important components of financial acumen, such as budgeting, prioritization, ROI and business performance. This article summarizes some of the key takeaways from the first session on budgeting. Check out the full webinar recording, including real life budgeting experiences from our panelists.

Why Budget?

We all have budgets of some kind. Whether it is a food budget, saving for a child’s education, or buying a house, we are always making decisions and spending our income to live our lives the way that we want. Budgets are about priorities – choosing what is most important for your lifestyle needs and goals and understanding incoming and outgoing cash to plan for the future.

There are fixed costs, which are expenses that you cannot cut back on. This can include rent, mortgage and utilities. Then there are variable costs, or expenses that you can either adjust or eliminate depending on what your budget needs. These might include food, a daily coffee or entertainment and travel. Many times, you may need to adjust your budget and unexpected expenses may come up – like an emergency medical bill or a new roof.

Your personal budget components directly correlate to budgeting in business, as a company has revenue (income) and Cost of Sales (fixed and variable costs).

Budget Components

So, what makes up a business budget? There are quite a few terms and line items when reviewing a business’ budget.

Revenue

First is revenue, or what is generated by the sales of goods or services in the normal course of business. In your personal budget, this would be similar to income. This is the starting point for all budgets and starts in the prior year, using historical revenue to forecast for the following year.

Expenses (Cost of Sales and S, G & A)

This is followed by the expenses of the business , which include fixed and variable expenses.

Fixed Costs

Fixed costs are expenses needed to run the business that are not flexible. These can include rent and utilities, business insurance, equipment and software, and people like HR and Legal. Many organizations take what they spend in the previous year, roll it into the next year, and include any increases expected.

Variable Expenses

Variable expenses change based on what the company targets are for growth and earnings. For example, if you are trying to grow revenue year over year, you might need to add salespeople, which can include travel and entertainment costs in addition to salaries. Costs of goods sold may also need to increase if revenue is increasing. For example, if you grow members on your platform, you will need to grow your service team to support those members.

Earnings 

Earnings are revenue minus fixed and variable costs and comprise the company’s profits or net income. Arguably, this is the most important component of the budget, as it determines if the company is profitable.

Cash Flow

A last important consideration, while not a budget line item, is cash needs for the year. A budget needs to take into consideration when the business needs and is expected to receive cash. This is important when considering new contracts – what are the payment terms 30-60-90 days? Will the fee be paid up front? Businesses want to receive fees up front or with the shortest payment terms to increase cash on hand. Subsequently, business want to hold on to their cash as long as possible, with longer payment terms.

How Budgets are Created

Budgets can be created in a top down or bottom up process, or sometimes a mix of both.

Top-down is an approach that starts with the organization’s overall budget and top line growth and earnings, and then assigns budgets for each department within it. This style involves very little involvement from business unit leaders.

Bottom-up works with individual departments to determine their needs before working out how they fit into the budget. This often involves business unit leaders planning out the need- and nice-to-haves. With this style, it puts ownership on the leaders to show how their budget and project plans will help pay for themselves or make the company more money over time.

Lastly is a mix of both. In this style, you might have numbers you are striving for, but you give leaders the opportunity to make adjustments so they have more involvement. This style can help ensure motivation and buy-in into the business strategy to hit those goals.

Hear from Budget Experts

While there are many components to a business budget and process, it is important to understand the basics and the impact on your role and goals. As part of this session, Nicole spoke with two experts, Dorothy Cantiello, Assistant Controller at One Call, and Andrea Mills, VP of Account Management at Ametros, about their real-life experiences managing a budget.

Check out the full webinar recording to hear their take on questions such as:

  • How do you think about growing new business?
  • How do you approach an opportunity that was not budgeted for?
  • Does your budget and pipeline always work out like you would expect?

By: Melissa Wright, Senior Director, Marketing, Ametros