Using Your Budget to Control Costs

Your budget must be a vibrant document, one that is well considered and that is used on an ongoing basis. Use it as a historical reporting system. Don’t look at how you’ve measured up to your goals months or even weeks after a period has closed. Check the important elements (direct costs as one example) far more frequently.

Use a Line Item Method

When you created your chart of accounts, you created a list of general categories such as office expense or repairs and maintenance. For the purposes of your profit and loss statement, those categories are all that is needed. But for the purpose of cost control, you may want to break down these items into subcategories. For example:

Utilities
# Gas
# Electric
# Water
# Sewage
Office expense
# Supplies
# Equipment leases
# Postage
# Temporary help
Insurance
# Liability
# Auto
# Health
# Life
# Workers’ compensation

This will give you detailed information on exactly where the money is being spent so you can monitor and correct any serious excesses. Comparing your fixed expense to the budget and the amount spent a year earlier on the same items is a good way to see if you are still in line.

Monitor on a Regular Basis

Even when the trend is exactly where you want it to be, don’t give up the regular habit of monitoring costs against budget.

Give Budget Authority to Managers

A critical element in delegation of work and authority is assigning responsibility for expenditures and bottom line outcomes. At the beginning of each period, identify the amount of money budgeted for each department manager and ask them to create a list of priorities. Then on each reporting period, check the results of their expenditures against the amounts budgeted. Perhaps you can include an incentive program for those who come in under budget. Whether in the corporate world or the world of small business, it is human nature to spend all the money in the budget because there is always some piece of equipment to upgrade or replace, or there is some inventory that is difficult to source and creates the desire to stockpile. Put a prize on resisting that urge, and don’t forget to explain all the reasonings behind budget decisions.

Be Prepared to Sacrifice

A healthy business can bring a good return, long term, to a prudent operator. Don’t make the mistake of choosing short-term satisfaction at the risk of long-term stability. Keep all the expenditures within reason until the company is well on its feet and able to easily afford them.

Source: Streetwise finance & Accounting