Budgeting and Gas Gauges
Most of us have done it at least once; push our vehicles beyond the fuel available to drive them. I've done it twice. Both times I was aware that my fuel was running low, but I was driving around trying to get to too many places in a short period of time and then, the dreaded sputter-stop. Most of us pay attention to the fuel gauge (though some do not - you know who you are!), and many of us have thresholds below which point we prioritize a trip to the gas station. That point for me is typically a quarter tank. We also look at our fuel gauge when we see those "Next fuel in 80 kms" signs, or when we are about to embark on a long drive, as nothing hampers the joy of being 3 songs into an anticipated road trip than having to take the next exit to stop for gas.
Now that we're in road-trip happy place, I'm going to switch gears here and talk about budgets, because tracking your budget can be looked at much like monitoring your fuel gauge. I know I've lost a lot of people at "budgets", but if you're still reading this, hear me out. If the thought of budgets makes your eyes glaze over in the same way mine do at an arts and crafts fair (I understand the passion for arts and crafts, I just don't share it), try to think of them like monitoring a fuel gauge.
To help you out, here are a few parallels between budgets and fuel gauges:
1. Budgeting is like ensuring you have enough gas in your vehicle to get to where you want to go. It’s effectively ensuring you have the financial fuel to reach the destinations that are the financial goals in your life. Maybe those goals are simply the necessities at this time (housing, food, transportation), maybe it’s a vacation plan, maybe it’s investment goals. Whatever the goals may be, budgeting is the process of determining how much financial fuel you need to reach that destination.
2. As you drive toward your destination you use fuel, and this is indicated on your fuel gauge, which impacts decision making. When you see those “Next Fuel Service in 80 kms” type signs, it typically prompts you to look at your fuel gauge, to see if you have enough to get you to the next fuel service station. In the same way, monitoring your budget allows you to see if you have enough financial fuel to make it to your next fueling station along the way. For most people, this is when they receive payment for their job, but this can be any inflow of cash or financial resources, which then allows you to continue toward your goals.
3. Making financial decisions based on budget performance is like topping up your fuel tank, or adjusting your route, when your gauge gets below a certain point. Not everyone is readily able to just make more money when funds get lower, and so this may then mean changing your spending at the time, in order to ensure that the financial fuel you do have left is sufficient to get you to your next payment (e.g., Pay day). This may also mean accessing sources of credit to cover potential shortfall months if that is an option.
4. Ignoring your budget when you know you are exceeding it is like driving with your fuel light on, hoping you can make it to the next fuel stop. This was me when I ran out of gas both times. The key here is to avoid getting into this situation altogether with your finances, so you aren’t living on a prayer that you’ll make it to the next destination. In addition to budgeting, forecasting out your cash flow is also a similarly effective exercise.
5. Having a contingency fund is like driving with a full Jerry Can in the back of your vehicle. I experienced this years ago during an epic road trip around Australia. We knew well in advance that there would be times when we simply would not have enough gas in our gas tank to get us to the next fuel service destination, and so we carried multiple Jerry Cans of gas, as fuel contingencies to get us through those circumstances. In the same way, it’s advisable to have a contingency fund, if possible, to be able to draw on during those periods where you may not have the financial fuel to get you to your next pay cheque. There are diverse opinions about how much this should be (e.g., 3 months of living expenses, etc.), but the important thing is that you have such a contingency fund if you are able to. It’s also worth noting that having your contingency fund parked in your chequing account may not be the best use of that capital. If you would like a recommendation for a financial advisor to help guide you through how to best utilize your contingency funds, please contact us.
Now, it is worth noting that when I use the term budget here, I'm more referring to operating expense budgets; not so much capital budgets, which I will leave for a future topic to discuss.
Lastly, it is also worth noting that the value of budget analysis is highly dependent on the information feeding into your cost data. If your expenses are not being tracked within the appropriate expense categories, in other words, if you don't really consistently know what you are spending money on, then your budget variance is not going to be very meaningful to you. For this, abide by the “GIGO” approach; “garbage-in-garbage-out”. If you just dump random cost information into expense lines without much rhyme or reason, your budget tracking will also not have much rhyme or reason. For personal finances, there are some great apps for budget tracking, such as Mint. For businesses, most well-used accounting platforms have budget tracking functionality built into the platform. If neither of those work for you, there’s also the use of good ol’ spreadsheets, although, unless your accounting platform has a direct link that updates your budget spreadsheets, you run the risk of violating the “thou shalt never enter the same data more than once” rule, necessary for minimizing redundant work, and so I offer the spreadsheet budget suggestion with that caveat.
At the end of the day, the important thing is that you regularly take intentional time to set and monitor your budget, to ensure you are able to make it to your next financial destination, and so that you know what changes you may need to make, if any, if it appears your current financial fuel may not get you there. In making this a priority, you may join the crowds of others who find that the simple act of tracking this regularly has a significant impact on finances, as you will have a much better pulse on your finances and the drivers behind your cash in and outflows, which will further enhance your ability to set financial goals that may have only been a hope and a prayer prior to tracking your budget.
If you would like to receive periodic emails containing more helpful tips for your business, please subscribe here.