Budgeting & the Cumulative Effect of Small Expenditures
Regardless of what anyone tells you, we all live within budgetary parameters, both in our businesses and at home. Some have much more leeway than others but even the wealthiest among us consider budgets and cash flow when making decisions. However, this piece will address issues more common to you and I as opposed to whatever Bezos, Buffett and Bloomberg are discussing with their financial teams (billionaire alliteration…who knew?!).
We have completed the first 4 months of 2018 and many of my current appointments revolve around reviewing the first quarter and tracking YTD budgets. Am I on track? Did anticipated income come to fruition? Were expenses in line with our budgetary goals? Did we correctly predict the timing of payables and receivables? These, and many more questions, allow us to analyze the budgets we've set and see if we deserve a pat on the back, need to adjust or should curl up in the corner and shed a tear (I kid...don't do that…as you’ll read, we can always adjust!).
When dealing with budgets with both small business and on the home front I find that folks often overlook the extent to which small changes can be impactful. This is where the phrase 'the cumulative effect of small expenditures' comes into play. If you're a small business and you want to generate an extra $10k or $15k per year to increase your take home $$$, to reinvest in the company, to give a great employee a raise, to offset a necessary increase in some other expense category, etc., you have options. If you're an individual or a family and you want to decrease your overhead by $2000 per year to set aside more retirement savings or to go on vacation, you too have options.
As a business, options for a higher bottom line include tax strategies, generating increased revenue and implementing/honing operating efficiencies. Another option, however, is to analyze your expense categories and see what small adjustments can be made to generate a greater cumulative effect. For example, do you need the internet bandwidth you’re paying for and can you reduce the cost of that monthly bill? Do you use all of the features of your software and is there a package you can switch to which would be less expensive but still include everything you need? Can you buy cheaper coffee for the breakroom? As opposed to bottled water for clients, can you add a filter to the sink and use a pitcher and reusable glasses (you can save the environment at the same time...win-win!)? These are all expense categories often overlooked but some quick research and a call to your current service providers could provide some savings.
Individuals and Families
For individuals and families, it is not always an option to develop an additional revenue stream especially if you are a salaried wage earner. If saving an extra $2000 per year is your goal, it's more achievable than you might think. Again, the cumulative effect of small expenditures can get you to close to your goal. For example, let's take your caffeine habit. (Before we go any further, I promise I won't ask you to give up caffeine. I have young kids...I have always understood the caffeine necessity but now more so than ever). If you go to Starbucks 5 days per week and get a cup of whatever they're hawking, you're spending an average of $4/day. When's the last time you did the quick math to see what that really costs you? In the event that you haven't used an addition device since the demise of the abacus, I'll do some PEMA for you. That coffee is running approx. $1040 per year. If you make your coffee at home, even after the initial purchase of a coffee maker of some kind, you can save half of your Starbucks cost in year one and closer to 3/4 subsequent years...that’s $500 to $750 per year. Another good example is cable/internet. How often do you watch all 4 premium channels in your package? Perhaps you only really need HBO. If you drop the premium package and buy one of the HBO apps, you can potentially save another couple of hundred bucks per year. Even another example, and perhaps the biggest potential savings category, is dining out/delivery. If you're eating out 3 or 4 times per week, eliminating one of those could save significant $$$. Let's take the example of a single person in NYC. If this individual eliminates one meal out per week at a cost of $20 and substitutes that with a meal that costs $5 to prep at home, the net weekly savings of $15 per week equates to an annual savings of $780. If you change that to a family of 4, it is easy to see how the annual savings could easily approach a couple of thousand dollars per year.
It is important to remember that saving some $$$ by considering the cumulative effect of small expenditures usually has a minimal impact on daily lifestyle. What we're discussing here are adjustments, not eliminations. These adjustments can put some extra $$$ into a kitty to use for whatever purpose you see fit.
Budgets can be difficult but adjustments and implementation can be simple. There's always a light at the end of the tunnel if you structure your finances correctly. If you need to set up a new budget or adjust an existing budget to allow for better cash flow management no matter how simple of complex, feel free to contact me for a consultation.
Adam Ditsky, CPA
President, Ditsky Strategic