Episode 4: Creating a Workable Budget
Last week we discussed the importance of creating a budget. I hope we convinced our listeners of the importance of doing that. Once you're over that hurdle, the rest flows more easily. Building on that information here are some practical approaches to creating that budget.
When working with clients, I talk as though they are hearing things for the first time. Start simple and build. Begin your budget by entering your monthly income. Include dancewear, snacks, and beverages - not just tuition. Include everything. Depending on how you choose to break it down, you will have one large sum (if you add all of your items together without separating out your chart of accounts) or individual sums that you later total.
Now, you want to do the same with your expenses except you're going to break those into two categories: fixed and variable. The first is your frequently occurring expenses, this is going to be your rent, utilities, studio software, and bookkeeping services. Then, you account for your varying expenses: snack bar items, guest teachers, music purchases - things you buy off and on throughout the season. Then take the fixed and variable expenses and add them up. Once that’s done, deduct your expenses from your income. You now have a monthly snapshot of what's going in and what's going out.
For studio owners there are a lot of months that look relatively similar, things are rolling along, you have your base of students that isn’t fluctuating all that much, but then you have the months that are very different - recital season - you spend more and hopefully make more. Summer - you may see a decline in income. Most industries follow certain trends and as a business owner you live in those trends, you are aware of them, but that doesn't necessarily mean you have developed a good plan for them.
You’ve gathered your financial information, and seen what's coming in, and what's going out. You know what your income needs to be in order to cover your expenses and make a profit. The budget is created; now, how do you work it?
Two ways to build your savings: 1. Decide to take a specific percentage of income each month. This ensures that the amount automatically adjusts according to your revenue. Another way to do this is deciding how much you wish to allocate to your savings from month to month based on the fat months vs. the lean months, In other words, you are choosing to put more money away on the months that your business is doing better. This is not percentage-based, but instead, a decision you are making from month to month. Keep in mind, during those ‘fat’ months you are thinking ahead and budgeting for the lean ones. Personally, I choose the percentage method, because it eliminates feelings. It’s a formula I follow that keeps me disciplined. Either method ensures you are not attempting to put the same amount aside in September that you are in July and August.
Erica mentioned fixed expenses: rent, utilities, internet, and variable expenses - or annual expenses, like insurance or ASCAP fees. The annual expenses are represented on paper - how do you recommend working them into the budget?
A great way to budget for those annual expenses is to divide the total amount over the number of months you would be saving for it. Ex: Your insurance is $500 a year and it renews every February, you may decide to take $50.00 each month for 10 months and set it aside so the funds are available when needed. As opposed to, “Oh man, it's February, I need an extra $500.00 this month”.
What if, for right now studio owners are just squeaking by and they don’t have that extra $50.00 to set aside, what else do you recommend?
With the economy right now, that's very possible! In this case, for annual expenses, do it when you have the profit available. Let's say you had a really profitable show in June- set the full amount aside then and maybe even a little extra. Then whatever you can take monthly, even if it’s $10.00 you can start moving those funds to savings and you can start to move away from the ‘recital payout’ method. Even if it’s a small amount, whatever you can afford to put aside, will help you. If you don’t have that little bit every month, take that chunk of it from those shows - the thinking behind that is, I’m in recital payout mode but I want to get away from that, so I am going to take that chunk I received and start to save a little more money, to help put some distance between and that ‘recital payout’ mentality.
You have to be organized to do this. It may be a cycle that we are in as studio owners. We’ve accepted that this is the trend in our industry and we can’t move away from it, but we can do things differently to not see the summer months as lean months because the cushion will be there, and July can be like June. Budgeting makes that possible. It really is all about discipline, it's not glamorous but it's effective. As much as we like to have those extra props or Starbucks or whatever the case may be. Discipline eliminates stress. It requires you to stop what you are doing in the midst of running your studio, sit down, and map it out. It is worth the time and it can change the trajectory of your business.