How To Create A Budget For Your Bookkeeping Clients
I’ve spoken before about the tasks that small business owners associate with bookkeepers. These tasks include things like:
- Bank reconciliations
- Payroll
- Simple financial statements
As bookkeepers, we can do a lot more to help our clients.
In some cases, the business owner just isn’t interested in anything beyond the basics. They see bookkeeping as a necessary evil and want to spend as little time and effort on the books as possible. These are not the clients we’re going to focus on today.
The other group of owners simply don’t know what else a bookkeeper does. Maybe this is their first business, or their previous bookkeeper did the bare minimum. Our job is to show them what else we can do to help them grow their business. And, helping them grow their business will help us grow our bookkeeping business.
There are quite a few things to include in this list. Cash flow management, forecasting, and software support are some options.
How to create a budget for your bookkeeping clients.
Depending on the type of budget you’re putting together for your client, this might fall into the initial “basic bookkeeping” list. If your client wants to hit $500,000 in sales and $200,000 in net profit next year, and you track against those numbers, that’s a pretty basic budget.
What is a budget?
I’m sure you all know this, but just in case I’m using a term that could apply to more than one answer, let’s define our discussion. Just like your personal budget, this is where we set goals for revenue and expenses for an upcoming period. The budget is set annually, and then optionally broken down into monthly and quarterly targets.
It doesn’t have to be static.
If you asked me a couple of years ago about a budget, I would be very firm in believing that you set a budget and then leave it. It felt like cheating to decide partway through a month to increase the Office Supplies budget after you overspent.
This was especially true for a business budget because I didn’t want the owner to come away from the year with a false reality. If they set a profit margin target of 15% in January, reduce it to 10% in June, and then hit 11% for the year, they’ll look back and see that they were above target.
A budget can just be a fixed reference point or a way to curb spending in one or two categories. That’s what a personal budget usually is, and that’s fine here too. But it can also be a potent tool to help manage the business.
What I recommend is doing both. Some time in Q4, create a full budget for the year ahead. It should be based on reality, but perhaps a bit aspirational. It’s where they want to business to be in a year if things go the way they plan.
Now create a copy of that budget. This is the one you’re going to work with.
Why would you want to create another budget?
Let’s say you and your client work on an excellent budget for 2021 in November of 2020. It has estimates for every income, cost of sales, and operating expense account. It’s based on 2020 data, and you both feel it’s realistic. Your client had income of $600,000 and net profits of $100,000 in 2020. They have estimated $700,000 of income and $150,000 of net profits for 2021.
In February 2021, they land a new client that will bring in an additional $400,000 of income and require new staff and equipment.
Suddenly the original budget is useless as a management tool. You’ll want to keep a copy of it because it will be valuable to look back and compare the year against how you both thought it would go. Having these insights will help when you’re making the 2022 budget.
Both QBO and Xero let you create multiple budgets. Then, when you’re running a Budget to Actuals report from either service, you can select which budget you want to use as the comparison.
You can go crazy with this if you want. You could set up budgets for different scenarios.
- 10% growth company-wide
- 15% growth in Department C
- What if we outsource all of Department B to an outside agency?
If you’re anything like me and prone to chasing down crazy scenarios, maybe limit yourself to just the two budgets for now.
- Original budget - doesn’t get adjusted.
- Operating budget - adjusted as significant changes occur.
Using the operating budget
There are no set rules here. I’ll give you my opinion, but how you use this is up to you and your client.
Start with the original budget
Use this budget as your initial framework. Obviously you’ll only know so much about 2021 in Q4 2020.
From there, as you progress through the year, make changes to the operating budget in these instances.
After you review the prior month’s financials, discuss any accounts that were significantly under or over budget. Decide whether this was a one-time issue, or an indication that you should change future months in the budget. When you find out about an upcoming change to the business. Examples would be:
- The need to hire more staff.
- A large change in revenue, either gaining or losing a big client/project.
- The need to upgrade software subscriptions. You know, like if the entire team suddenly needs to work from home for 18 months.
My main rule (which you are not obligated to follow) is to never change the budget retroactively. We all want to be experts at setting the budget. We see Office Supplies going 2x over budget and we want to bump up the budget to match. Or, we make a decision to increase Advertising in April after being over for Q1, and want to go back and say it applies to the whole year.
As tempting as it is to make yourself look like some type of budget psychic, it doesn’t do you any good. It’s from reviewing the times you weren’t right that you improve your skills.
Using a budget as a tool rather than a measuring stick can help your client make quicker, and more strategic decisions throughout the year. This not only helps their business, but greatly increases your value. (ok, yes, I guess a measuring stick is a tool too, but you get it, right?)
These are just my opinions on using a budget. What about yours? Do you and your clients review their budget regularly? What lessons have you learned? Please contact me and share your stories. I’d love to hear from you.
