Contingencies must be anticipated. This seemingly absurd phrase hides a deplorable truth: spending outside the budget is inevitable for any company. Force majeure, unexpected investment opportunities, rising prices, or forced change of contractor are the reality of any business. It is impossible to build business processes so that costs never arise. And this means that you need to learn to live with them.
Large companies usually allocate a fixed amount for a significant period, which should cover all the costs of a certain activity — for instance, a budget for covering PR costs for a year. It is highly undesirable to exceed this amount. Therefore, it is the task of ordinary managers to optimize costs.
Budget for expenses that are not foreseen
Financial advisors recommend any business to have a stabilization fund — a kind of financial cushion in case of unexpected costs. By the way, this decision is used not only by commercial structures: since 2004, the state also has such a fund. The recommended size of such a reserve is the amount of expenses for three months, and it should be stored in highly liquid assets. This can be cash, short-term deposits, Spot Metals, bonds, etc.
All large, medium, and most small businesses usually have such a fund. In microformations, it is often absent, or its size is insufficient to cover large costs. The source of funds for unforeseen expenses can also be the company’s profit in the form of the owner’s investment. Unfortunately, the owners of microformations often do not have enough savings (or simply do not want to share). In such cases, you have to turn to special methods like forex trading.
Where to get money
There are a huge number of approaches to dealing with over-budgeting. The choice of a specific solution depends on the scale and type of business, its structure and specific situation. We’ll look at the most versatile methods that work for most cases.
Since it’s best to learn these tools in action, consider a small IT agency of five people in Nigeria who suddenly had a very promising project. The project promises great benefits in the future, but it requires hiring a specialist to launch it. And it seems that a specialist has been found and is ready to go to work even tomorrow, all that remains is to buy equipment for him for 20 thousand dollars — and the budget does not have these funds, as well as in the stabilization fund and the owner. What to do?
As stated by Forextime, the first option in such a situation is to make a managerial decision to change the cash flow, making sure that the company’s revenues exceed expenses in a certain period. In our case, a postpaid agency is trying to negotiate an advance payment with the client to purchase equipment for a new employee with this money. Of course, this is a certain risk: an advance payment automatically obliges you to do the job well and on time — but on the other hand, you get funds that can be invested in the project.
If the customer does not agree to such conditions, you can opt for the second option and try to negotiate with a specialist — for instance, that he will temporarily work from home from his computer. If the new employee’s own equipment remains wanting, we move on to the next method.
An organization’s budget is usually divided into certain items of expenditure, conditional envelopes: for instance, employee salaries, office rental costs, marketing costs, etc. In case of unforeseen expenses, money is often taken from other such envelopes. But this is an ambiguous decision since it inevitably entails a shortage of funds in the envelope that you used. To prevent such a situation from arising, the amount spent must be compensated within one billing period. Otherwise, you risk that the hole in the budget will grow further.
The second rule — when choosing the direction from which you are going to take out funds, you need to calculate the feasibility of this measure and carefully weigh the pros and cons. The ideal tool for this is the so-called Descartes square: a popular decision-making method, where each is assessed according to four criteria:
What will happen if it happens?
What will happen if it does not happen?
What will not happen if this happens?
What will not happen if this does not happen?
In case of emergency
If all the above options do not work for some reason, there is one more way out, perhaps the most unpleasant one — this is a loan. The loan involves the payment of interest, which will increase the amount of unplanned expenses. But if the waste is justified and the game is worth the candle, it is better to opt for it than to abandon the project and miss out on the opportunity for future growth.
Funmilola Bolaji is a Researcher, Writer and a trained Educationist; she’s the editor of Campusbiz Journal. You may want to reach her via email@example.com for Campusbiz Journal related inquiries only.