Sunday, October 28, 2012

Annual Forecasting

One of the most important budgeting strategies I learned in banking was annual forecasting.  Each year around this time we were required to submit a budget plan for the following year and in it we listed what salaries, supplies, and equipment expenses we expected to have.  After the preliminary numbers we would work it and work it to review each line item and devise ways of cutting expenses or maximizing usage of the resources we needed.  We had many industry buzz words that I no longer even remember to refer to each type of expense.  All contributed to what was ultimately "the bottom line" for our department. 

A typical example of this might be the lease term on our copy machine might be due to expire.  Reviewing that line item we would track our usage and needs for that product and then speak to multiple vendors and determine whether we would maintain, upgrade, consolidate, minimize, or eliminate that expense.

After years of reviewing budgets in this manner my mind instinctively continued the process even after finding myself outside the banking world and living on a small farm in need of repair and no upper management to make sure I had the funds to insure my ongoing operation and success.  It was definitely culture shock.

I consider the single most important tool I learned in the process was converting all expenses to an annual basis.  At first glance that may seem silly but let me provide a simple example to display the impact.  Let's say it is my habit to stop at the store after work to pick up my food supplies for the next couple of days.  While there I may add a few snacks or sales to my cart.  On the average I spend $50 for each trip.  On other days I find myself too tired to cook so I stop at a restaurant and get some take out or a pizza which is another $25 or more per stop.  I then go out to lunch with coworkers each work day costing an average of $8.  Even reading this it may sound excessive but I hear people taking about it each and every day at work. Last but not least is the $3 a day cup of coffee at the local drive through (this is an average from the 7/11 or Starbucks cups I see coming into the office). All of these are out of pocket expenses so a tally is rarely kept.

So what is our total?  I come up with roughly: 4 x $50 = $200, 2 x $25 = $50, 5 x $8 = $40, 5 x $3 = 15 for a grand total of $305 per week.  This equates to  $1,220 per month and a whopping $14,640 per year.   For some this may be extremely high and for others very low.  I have not even included what one is spending on the weekends and included it in the weekly groceries purchased.  Family size also factors in and my estimates are based on the people I see at work who have two adults and a child in the family.  Also missing are what the other adult might be spending and needs specific to babies.

It is no wonder then that many are out of money before they are out of month.  Though food might be the most obvious of expenses that can easily get out of control other expenses can be just as insidious when we look at the monthy expense which seems manageable compared to the annual expense that rocks our world. 

There are two ways this has been addressed in In The Trenches.  The first is through developing a Minimum Basic Budget which forecasts expenses by month and totals them by year and second is the Expense Reduction Chart.  Both are available to download and copy or use in excel and are at the right hand side of the blog.

One of the things I have found to be so helpful with this approach is that it not only helps to identify ways that expenses can be reduced is that it also helps to see that giving up some of our smaller expenses may create more unnessary misery than providing any worthwhile gain.  There is the old saying of "Stepping over the dollar to pick up a penny".  Though we do not want to waste anything we can be so penny concious that we miss the big ticket items that may not be so obvious.

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