Jun 25

Jun 25 How To Create A Budget For Your Bookkeeping Clients in 2023

In many ways, a good budget spreadsheet is one of the most valuable tools you can provide for your bookkeeping clients.

Is it the most common task you will perform in your bookkeeping business? No, probably not. Most business owners just want the bare essentials. They want their bank account reconciled and a basic set of financial statements so they can hand everything to their accountant at tax time.

Those are not the clients we will focus on today. In fact, I'd argue those are not the clients we should focus on...period.

Let's focus on the small business owner that wants to know more about their company. They want bookkeeping services that give them a clear picture of the upcoming year. They want to know how their revenue looks and where to reign in their expenses. And, most importantly, they want your expertise to create this budget.

How to create a budget for your bookkeeping clients.

Before we create budgets we need to define them.

What is a small business budget?

A small business budget is a detailed financial plan. It's meant to outline projected income and expenses over the year and provide a roadmap for financial decision-making.

You're essentially creating an imaginary income statement for the upcoming year. Ideally, this will combine reality with goal-setting. You want to help your bookkeeping clients grow, but you don't want to set them up for disappointment.

Which business budget software should I use?

Use your spreadsheet software of choice. I prefer using Google Sheets when I'm collaborating with a client, but Microsoft Excel is the more powerful choice. In this case, either will work, as you're not tapping into any advanced features. And yes, you can totally use Apple's Numbers or LibreOffice or any other open-source software.

What about creating budgets in QuickBooks Online or Xero?

This is where these budgets will end up, but it's not the place to create them.

You're going to make a lot of changes to the budget along the way. You will draft up an initial template. (I prefer starting with last year's numbers as a first draft.) Your clients will give you some feedback about their hopes for the year. You will counter with a gentle dose of reality. Lather, rinse, repeat.

You'll do this a few times, which is much easier to do in a spreadsheet. You can also add notes and link to other reference materials, which makes the process much easier.

Include the small business owners in the process.

This part is super important. Don't just present them with a confusing set of numbers as though you've come down with a stone tablet. The more your clients are involved in creating the budget, the more invested they'll be in achieving those goals.

What do I include in a budget?

You will add all the same accounts and categories as you would in an Income Statement. Let's break down the basics.

Income

The sales, by month, your client expects/hopes/needs to achieve.
Have a row for each income category.
If they have multiple revenue streams (i.e. products and services) and they don't track these separately, this is a great time to make that suggestion.
Knowing where their revenue is coming from is crucial when making decisions about where to focus their resources.

Cost of Sales or Cost of Goods Sold

If they sell products, I use Cost of Goods Sold. If they only sell services I use Cost of Sales.

All direct costs associated with the production of the goods or services sold by a business.
Raw materials or wholesale cost of the products they sell.
Labour costs related to the services they sell.
- This is normally the total costs associated with the billable team members. If you want to take it a step further, you could assign the billable portion of their expenses (salary, taxes, benefits, etc.) here, and the non-billable portion in Operating Expenses.
Some clients will also include direct expenses like merchant fees (eg. Stripe, PayPal) here since they are directly tied to the sale.

Operating Expenses

Basically, almost every other expense you track.

Bank fees
Advertising
Office Supplies
Indirect Labour
Insurance
etc.

Other

Depending on the structure of the business, your client may have "Other Income and Expenses" that they track below Operating Expenses. This could be things like taxes paid, currency gains/losses, etc. Your client may also just want to separate out certain expenses, such as staff bonuses. These are things you will sort out during the back and forth with your clients.

Once you and your client have agreed to the basic format of the budget, here's my pro tip.

The budget 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 net 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 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 powerful 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 aspirational. It's where they want their 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. Just create it as a separate sheet (I always call them tabs) in the budget spreadsheet.

Why would you want to create another budget?

Let's say you and your client work on an excellent budget for 2024 in November of 2023. It has estimates for every income, cost of sales, and operating expense account. It's based on 2023 data, and you both feel it's realistic. Your client had income of $600,000 and net profits of $100,000 in 2023. They have estimated $700,000 in income and $150,000 in net profits for 2024.

In February 2024, 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 2025 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. I know in Xero you can create a custom report that will include more than one budget, so you can see how your actuals compare to both budgets in one report.

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 2024 in Q4 2023.

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.
A spike in unexpected costs, like the need to upgrade software subscriptions. You know, like if the entire team suddenly needs to work from home for 3+ years.

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 prophet, it doesn't do you any good. It's from reviewing the times you weren't right that you improve your skills.

Advanced Level: Create detailed tracking by category.

The brilliance of using spreadsheets is that you're not limited to creating one type of budget. QuickBooks Online or Xero will give you their template, which is going to be fine for most small business owners.

If you want a challenge, and if your clients want a bit more control over certain parts of the budget, you can create detailed sheets to track individual sections of the main budget.

Sometimes a row with a number isn't enough of a planning tool. Your client might want to track multiple variables and have those totals feed that row of the budget. Here are some examples.

Staff Costs

Estimating staff costs at $500,000 next year is fine, but maybe you need to manage for different scenarios.

What if they give the existing staff a 10% raise?
Should we hire full-time employees or use contractors?
What if a recession hits. How would reducing staff affect the big picture?

Revenue Categories

What if they shift their business plan to start selling more products than services?
What if they move to a different vendor who charges less but requires larger minimum orders?
What if they increase the hourly rate on their services by 20%?

You can (and I have) go too far and create a monster, so be intentional with your decisions. You want to create value for your bookkeeping clients, not homework.

Final Thoughts

Using a budget as a tool rather than a measuring stick can help small businesses 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?)

I think many clients ignore the budget and other financial reports because they're too generic. One word attached to one big number doesn't tell a story. Showing them how you got to that number involves them in the process and makes the plan feel tangible. Providing bookkeeping services that are tailored to each of your existing clients is how you differentiate yourself as a bookkeeper.

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?

Also, do you want to know more about the process? If there's enough interest, I could create a more detailed explanation about the process, or even create some Google Sheets templates.

Please contact me and share your stories. I'd love to hear from you.