Expenses
Here is a list of the expense items generally found on most financial statements, followed by brief comments on how these items may be forecasted. This list is not all inclusive; you may have items on your financial statements not shown here. Any items of importance to you should be reflected on your financial statements to allow you to keep an eye on the expenses.
Advertising: If advertising is not a major expenditure, determine your forecasted amount by using the prior year's advertising expense as a percentage of the prior year's sales. Apply this percentage to the current year's predicted sales. This percentage should be applied to each month. If advertising is a significant expense, consider establishing your forecast in conjunction with your ad agency.
Automobile: Estimate a reasonable cost for operating an auto during the year, and multiply that cost by the number of company cars. This will give you your annual expenditures. To arrive at the monthly expenditure, divide this number by twelve. Using this result, however, is not as good as determining what each month should be, and entering the monthly amounts in the forecast.
While you are in the process of counting autos, you might consider whether the company needs as many autos as it's currently paying for. Also consider whether you may be able to use less expensive autoÂmobiles, or whether you should lease. Be sure to figure in insurance, interest payments, repairs, and maintenance. If you do opt to lease, all payments should be included in the forecast. Don't forget the IRS record-keeping requirements.
Bad debts: Review historical data to track bad debts as a percentage of sales. Take your historical percentage and apply it to the sales for each month of your forecast. If you believe the percentage is excessive, a reduced percentage may be in order. However, try to be realistic; now may be the time to review credit policies, put some delinquent accounts on a cash only basis, and cut off others. Develop a consistent policy and stick to it.
Business promotion: Take the number of people in the company who are in sales, and multiply that by the number of dollars you consider appropriate for each person to be spending for promotion during the ensuing year. Compute promotion as a percentage of sales. Apply that percentage for every month of the forecast. Or, take the annual amount and divide it by twelve, and apply the 1/12 to each month of the forecast. Again, using this result is not as good as determining what each month should be, and entering the monthly amounts in the forecast.
Collection costs: Because accounts receivable are getting tougher to collect, you should consider forecasting some additional dollars for collections during the year.
The best way to determine the amount would be to review what percentage of sales the collection costs have been running historically, and apply that percentage to each month's sales. You may want to forecast additional costs if you plan on taking a hard-line approach to collections.
Continuing education: This is an area where few entrepreneurial companies spend significant dollars. After you've read this book, I hope you will have been convinced to spend on this extremely important expense.
To determine your forecast, review the people in your organization and see which ones might benefit from continuing education. Don't forget to include yourself. Multiply the number of people by the dollars decided for each. This will be your annual expense. For simplification in applying the dollar amounts to the monthly forecasts, just divide the total allocation by twelve.
Depreciation: This item is purely a function of methods that you are already using for tax or financial statement purposes. Take your annual amount, divide it by twelve, and apply this amount to each month of the forecast.
If your tax depreciation produces an excessive expenditure, consider using a different method for financial statements. Longer useful lives with lower depreciation rates will enhance your financial statements and present a better picture to whoever uses the statements.
Donations: This too should be forecasted. Decide on your annual amount, stick to it, and if you think you may want to add an extra amount for unanticipated causes, by all means do so, but do it in the beginning of the forecast year. For your monthly forecast divide by twelve and apply the amount to each month of the forecast.
Dues and subscriptions: Now is the time to make certain that all those organizations you've joined and publications you subscribe to are of benefit to your company. Then, look at the previous year and add for increased costs. If you are anticipating some additional expenditure in this area you should certainly forecast them at this time. Apply 1/12 to each month of the forecast.
Insurance: General insurance is the cost of insuring equipment, liability, etc. Call your insurance agent and find out exactly what you should anticipate in insurance premiums for the year. Use this amount for your forecast. Or, if you are consistently paying the same amount from year to year, look at the prior year's financial statements and use that number plus a percentage increase. Since insurance is expensive, try to be as realistic as possible in forecasting monthly amounts.
While reviewing your forecast, you should determine whether your coverage is adequate. A complete review of your insurance program at this time may save dollars.
Group insurance: There are several items that will be based on the number of employees you have in your organization. To determine these items you should forecast the number of employees you anticipate having in each month over the next twelve months. This will require you to plan when you will be adding or possibly reducing your personnel. To forecast your group insurance, take the number of employees each month, multiply that by the group insurance rate, and you have your forecast.
Life insurance: Life insurance is generally an item provided to a few people in the organization. Call your insurance agent and find out what you should be forecasting for life insurance. Ask your agent when the premiums are due and place it on your forecast on the due dates. The life insurance industry has developed many new products over the past few years. Have your coverage analyzed to see if costs can be reduced.
Interest: This item depends on what you are going to be borrowing and what the interest rates are going to be in the future. It is best to anticipate high when it comes to interest, therefore, when you review your cash requirements, project high. A 20 to 30 percent increase over the previous year may be in order. Keep your fingers crossed that it won't happen. Only God and the chairman of the Federal Reserve Board can tell us where interest rates will be going.
Since interest is a function of loan balances, forecast it by amortizing any term loans by using the loan payment schedule and credit line interest based on the credit line balance at the end of each month.
Legal and accounting: To determine what to forecast for legal and accounting, ask your lawyer and accountant what they anticipate your costs will be during the year. If you feel that their anticipated fees are high, negotiations may save you some money.
Office supplies and postage: Sometimes this can be a tough category to anticipate. Go back and look at what the annual percent has been running for the past few years; apply that percent on a month-by-Âmonth basis to your forecast. Also, consider whether the percent has been reasonable in the past and if you feel you may be able to reduce it. Generally, historical percentage is the best method for forecasting this item.
Rent: This forecasted number is easy. Just use your monthly rent figure for each month of the forecast. Don't forget any cost of living increases, mall charges, or property tax and expense escalations. If rent is a percentage as in many retail operations, then forecast using the percentage.
Repairs and maintenance: Review the annual percentage over the past few years, and apply that percentage on a month-by-month basis to each month's sales.
Don't forget to include contracts for preventive maintenance. Now may be the time to consider whether to upgrade and improve equipment that requires constant maintenance.
Salaries: This item is not difficult to forecast if you prepare for it by thinking through your plans for each employee. My suggestion for forecasting salaries is to literally count the numbers of employees you anticipate each month. Add up each employee's anticipated monthly salary and you have your forecast for the year.
Remember to forecast approximate salary increases. If you have a large number of employees, tell your bookkeeper to prepare a schedule of employees with anticipated raises.
While you're reviewing salaries, you should consider developing standard policies for sick leave, vacation, holidays, and other fringe benefits. Your company's policies should be communicated in an employee manual. This is a must. It will prevent confusion, conflict, and even lawsuits.
Taxes and licenses: Determine the historical percentage and apply that factor to the current year. Check appropriate city, state, and federal sources for potential increases. Divide by twelve and apply it to each month of the forecast.
Taxes and Payroll: This should be forecasted by taking a percentage's anywhere from 10 to 12 percent of the gross payroll cost. Apply the percentage to each month's payroll.
Telephone and utilities: Check prior years' records to get a rough estimate of the percentage of sales. Apply this percentage to each month; add 10 to 15 percent to this number. Another method is to take the prior year's dollars, add 10 to 15 percent to that number and divide by twelve to determine each month's expense.
Travel: Increasing travel costs make it necessary to plan realistically and early. If you anticipate extensive travel, this is the time to sit down and decide what trips will be taken, where you will be traveling, and who will be going. Develop a written travel policy. Avoid travel by whim.
If your company travel plans are modest, take the total annual dollars and divide by twelve to determine your monthly forecast. If you project extensive traveling, I recommend that you calculate each month separately by the actual anticipated trips for the given month.
Company travel can result in employee abuse of the privilege. Make certain adequate documentation is available after each trip. This will result in controlled costs and fewer headaches with the IRS.
Look closely at trips to conventions and trade shows. Are they necessary, or are they just social gatherings?
Here is a list of the expense items generally found on most financial statements, followed by brief comments on how these items may be forecasted. This list is not all inclusive; you may have items on your financial statements not shown here. Any items of importance to you should be reflected on your financial statements to allow you to keep an eye on the expenses.
Advertising: If advertising is not a major expenditure, determine your forecasted amount by using the prior year's advertising expense as a percentage of the prior year's sales. Apply this percentage to the current year's predicted sales. This percentage should be applied to each month. If advertising is a significant expense, consider establishing your forecast in conjunction with your ad agency.
Automobile: Estimate a reasonable cost for operating an auto during the year, and multiply that cost by the number of company cars. This will give you your annual expenditures. To arrive at the monthly expenditure, divide this number by twelve. Using this result, however, is not as good as determining what each month should be, and entering the monthly amounts in the forecast.
While you are in the process of counting autos, you might consider whether the company needs as many autos as it's currently paying for. Also consider whether you may be able to use less expensive autoÂmobiles, or whether you should lease. Be sure to figure in insurance, interest payments, repairs, and maintenance. If you do opt to lease, all payments should be included in the forecast. Don't forget the IRS record-keeping requirements.
Bad debts: Review historical data to track bad debts as a percentage of sales. Take your historical percentage and apply it to the sales for each month of your forecast. If you believe the percentage is excessive, a reduced percentage may be in order. However, try to be realistic; now may be the time to review credit policies, put some delinquent accounts on a cash only basis, and cut off others. Develop a consistent policy and stick to it.
Business promotion: Take the number of people in the company who are in sales, and multiply that by the number of dollars you consider appropriate for each person to be spending for promotion during the ensuing year. Compute promotion as a percentage of sales. Apply that percentage for every month of the forecast. Or, take the annual amount and divide it by twelve, and apply the 1/12 to each month of the forecast. Again, using this result is not as good as determining what each month should be, and entering the monthly amounts in the forecast.
Collection costs: Because accounts receivable are getting tougher to collect, you should consider forecasting some additional dollars for collections during the year.
The best way to determine the amount would be to review what percentage of sales the collection costs have been running historically, and apply that percentage to each month's sales. You may want to forecast additional costs if you plan on taking a hard-line approach to collections.
Continuing education: This is an area where few entrepreneurial companies spend significant dollars. After you've read this book, I hope you will have been convinced to spend on this extremely important expense.
To determine your forecast, review the people in your organization and see which ones might benefit from continuing education. Don't forget to include yourself. Multiply the number of people by the dollars decided for each. This will be your annual expense. For simplification in applying the dollar amounts to the monthly forecasts, just divide the total allocation by twelve.
Depreciation: This item is purely a function of methods that you are already using for tax or financial statement purposes. Take your annual amount, divide it by twelve, and apply this amount to each month of the forecast.
If your tax depreciation produces an excessive expenditure, consider using a different method for financial statements. Longer useful lives with lower depreciation rates will enhance your financial statements and present a better picture to whoever uses the statements.
Donations: This too should be forecasted. Decide on your annual amount, stick to it, and if you think you may want to add an extra amount for unanticipated causes, by all means do so, but do it in the beginning of the forecast year. For your monthly forecast divide by twelve and apply the amount to each month of the forecast.
Dues and subscriptions: Now is the time to make certain that all those organizations you've joined and publications you subscribe to are of benefit to your company. Then, look at the previous year and add for increased costs. If you are anticipating some additional expenditure in this area you should certainly forecast them at this time. Apply 1/12 to each month of the forecast.
Insurance: General insurance is the cost of insuring equipment, liability, etc. Call your insurance agent and find out exactly what you should anticipate in insurance premiums for the year. Use this amount for your forecast. Or, if you are consistently paying the same amount from year to year, look at the prior year's financial statements and use that number plus a percentage increase. Since insurance is expensive, try to be as realistic as possible in forecasting monthly amounts.
While reviewing your forecast, you should determine whether your coverage is adequate. A complete review of your insurance program at this time may save dollars.
Group insurance: There are several items that will be based on the number of employees you have in your organization. To determine these items you should forecast the number of employees you anticipate having in each month over the next twelve months. This will require you to plan when you will be adding or possibly reducing your personnel. To forecast your group insurance, take the number of employees each month, multiply that by the group insurance rate, and you have your forecast.
Life insurance: Life insurance is generally an item provided to a few people in the organization. Call your insurance agent and find out what you should be forecasting for life insurance. Ask your agent when the premiums are due and place it on your forecast on the due dates. The life insurance industry has developed many new products over the past few years. Have your coverage analyzed to see if costs can be reduced.
Interest: This item depends on what you are going to be borrowing and what the interest rates are going to be in the future. It is best to anticipate high when it comes to interest, therefore, when you review your cash requirements, project high. A 20 to 30 percent increase over the previous year may be in order. Keep your fingers crossed that it won't happen. Only God and the chairman of the Federal Reserve Board can tell us where interest rates will be going.
Since interest is a function of loan balances, forecast it by amortizing any term loans by using the loan payment schedule and credit line interest based on the credit line balance at the end of each month.
Legal and accounting: To determine what to forecast for legal and accounting, ask your lawyer and accountant what they anticipate your costs will be during the year. If you feel that their anticipated fees are high, negotiations may save you some money.
Office supplies and postage: Sometimes this can be a tough category to anticipate. Go back and look at what the annual percent has been running for the past few years; apply that percent on a month-by-Âmonth basis to your forecast. Also, consider whether the percent has been reasonable in the past and if you feel you may be able to reduce it. Generally, historical percentage is the best method for forecasting this item.
Rent: This forecasted number is easy. Just use your monthly rent figure for each month of the forecast. Don't forget any cost of living increases, mall charges, or property tax and expense escalations. If rent is a percentage as in many retail operations, then forecast using the percentage.
Repairs and maintenance: Review the annual percentage over the past few years, and apply that percentage on a month-by-month basis to each month's sales.
Don't forget to include contracts for preventive maintenance. Now may be the time to consider whether to upgrade and improve equipment that requires constant maintenance.
Salaries: This item is not difficult to forecast if you prepare for it by thinking through your plans for each employee. My suggestion for forecasting salaries is to literally count the numbers of employees you anticipate each month. Add up each employee's anticipated monthly salary and you have your forecast for the year.
Remember to forecast approximate salary increases. If you have a large number of employees, tell your bookkeeper to prepare a schedule of employees with anticipated raises.
While you're reviewing salaries, you should consider developing standard policies for sick leave, vacation, holidays, and other fringe benefits. Your company's policies should be communicated in an employee manual. This is a must. It will prevent confusion, conflict, and even lawsuits.
Taxes and licenses: Determine the historical percentage and apply that factor to the current year. Check appropriate city, state, and federal sources for potential increases. Divide by twelve and apply it to each month of the forecast.
Taxes and Payroll: This should be forecasted by taking a percentage's anywhere from 10 to 12 percent of the gross payroll cost. Apply the percentage to each month's payroll.
Telephone and utilities: Check prior years' records to get a rough estimate of the percentage of sales. Apply this percentage to each month; add 10 to 15 percent to this number. Another method is to take the prior year's dollars, add 10 to 15 percent to that number and divide by twelve to determine each month's expense.
Travel: Increasing travel costs make it necessary to plan realistically and early. If you anticipate extensive travel, this is the time to sit down and decide what trips will be taken, where you will be traveling, and who will be going. Develop a written travel policy. Avoid travel by whim.
If your company travel plans are modest, take the total annual dollars and divide by twelve to determine your monthly forecast. If you project extensive traveling, I recommend that you calculate each month separately by the actual anticipated trips for the given month.
Company travel can result in employee abuse of the privilege. Make certain adequate documentation is available after each trip. This will result in controlled costs and fewer headaches with the IRS.
Look closely at trips to conventions and trade shows. Are they necessary, or are they just social gatherings?