EntreLeadership - Why Every Business Needs a Budget with Dave Ramsey

Episode Date: August 9, 2021

Cash flow is the gasoline in any small-business’s engine. And sure, we all know it’s important to manage your money—but some business owners believe that only means looking at the profit and loss statement once a month. While this financial strategy is better than having no strategy, it can lead to problems—and there’s a better way. The answer? A budget for your business. In this episode of The EntreLeadership Podcast, we sit down with Dave Ramsey, the CEO and founder of Ramsey Solutions. He talks about why having a budget for your business is so important. Then George Kamel chats with Ramsey Solutions Senior Executive Director of Finance Jeff Williams. Jeff lays out a step-by-step process you can use to start budgeting for your business.   Take The EntreLeadership Podcast Audience Survey   The EntreLeadership Podcast Dave Ramsey's website Learn more about EntreLeadership business coaching. How to Calculate Retained Earnings by Ramsey Solutions Download The 6 Financial Reports That Can Save Your Company. Schedule a call with Tim, our producer.   Learn more about the offers from our EntreLeadership Partners: BELAY | Gravy | Hite Digital Learn more about your ad choices. Visit megaphone.fm/adchoices

If you want to survive in business, you've got to make money. But tracking every dollar can be an afterthought. You didn't start a business to live in spreadsheets and crunch numbers, but you need more than a profit and loss statement to get your business to where it needs to go. From the Ramsey Network, this is the Entree Leadership Podcast, where we help business leaders grow themselves, their teams, and their profits. I'm your host, George Camel, and in today's episode, we're talking about budgeting for your business,

which connects to our business driver of profit. Our first guest is Dave Ramsey. He's the CEO of Ramsey Solutions and a number one national bestselling author of the book, Entree Leadership. He's also a personal finance expert and host of the Ramsey Show. And since 1992, Dave has used his business to help people take control of their money, build wealth, and better their lives. I sat down with Dave to talk about why a budget is essential to your business. In our second conversation, I talked to Ramsey leader Jeff Williams. He's our senior executive director of finance, and we talk about how to actually make that budget and the do's and don'ts when putting it to

together. Up first, we've got my conversation with Dave around why you need a budget for your business in the first place. Dave, I did a little research. Not a lot from you on budgeting out there. Not a lot of content. So I'm excited to dive into this today. You know, you've heard the saying, mo money, mo problems, but it turns out no money, no business. So cash flow, operating, the finances, the budgeting, it's a huge part of running a business. And it be tough to do well and it can take time. And I think a lot of listeners out there, they may be those treadmill operators and they're the chief everything officer and it's still on their plate. They're dealing with all the finances or maybe they're not budgeting at all. Have you found that to be

the case? Can you somehow run a business without really doing a budget? Yeah, you just try to out-earn your stupidity. You know, you just try to have so much money coming in that all the chaos going out is okay. And that's about the only way you can pull that off. Instead, what we find is, and what I found running my own business when it was little and just getting started all the way up to now, is that by having a game plan, I've got control of the money. It's going only where it's supposed to go. And I create a lot more margin. And I'm much more relaxed running the business. There's this frantic thing that goes with the chaos, this out of control feeling that goes with a chaos, and you feel out of control because you are. Yeah, it seems like one of those

rookie business mistakes to go, all right, we're just going to try to outspend our stupidity and not really have a plan. But, you know, we're in a different place. There's a lot more zeros on our budgets than there was, you know, 25, 30 years ago. So take us back to the early days. Were you budgeting day one of the business? Yeah, because I believe it's a biblical financial principle. And I was doing it in my personal life. And, you know, a budget is telling your money where to go instead of wondering where it went. You know, John Maxwell says. Zig Zigler says, if you aim at nothing, you'll hit it every time.

And so we wanted to be very, very intentional with the dollars. And, you know, basically what a budget is is you're planning how you're going to run your business. Because the money is flowing to your values. It's flowing to your priorities. It's flowing to the things that matter to you in the business. And so for it to accidentally go in another direction and then not be able to do something super important, due to chaos is ridiculous. So, yeah, you've got to drive by looking out the windshield. Do you think there's a lot of business owners who are going, well, Dave, I can't plan for the chaos.

The chaos is always happening and I'm just reacting to every new expense and thing that comes my way. Yeah, you can. I mean, Christmas is always in December. You can predict a lot of things. There are some things you can't predict and you leave some margin in your budget for that. You've got some variable things that you're going to have anytime. But basically, all the budget is you're forecasting your revenues and you're forecasting what you're going to do with them. And you're going to do that for the week, the month, the quarter, and the year, once you start getting a little bit more sophisticated. But, you know, in the early days, I was doing a month at a time. I'm saying, okay, this month, I think we're going to bring in this much money.

Okay, what are we going to do with it? How much of it are we going to take home? How much of it are we going to spend reinvest into inventory? What are we going to do with the money? Are there a lot of parallels between the personal budget and personal finance versus business, because I'm sure there's differences. There's just a different world when you get into business, but how much of it is the same? I mean, the concept is the same. What happens with most businesses, the first accounting report we get is the P&L

and the profit and loss statement. And it shows, you know, what our profit was, what our loss was, what our revenues were, what our expenses were, you know, revenues minus expenses equals profit or loss, right? And so we get that, and we think we're doing accounting then. But all that tells you is what happened. It doesn't tell you what's. it's going to happen. It doesn't give you a guardrail to control and drive your car with. So you're driving your car only with rearview mirror instead of the windshield. The windshield's a lot bigger. And so you've got to look out ahead and plan. Otherwise, you're going to fail. So really the P&L statement is just saying, here's a report on what happened. But you're saying the

budget is planning, which is a whole lot different. Yeah. You're trying to create a predictive environment that you can operate in, which gives you a lot more peace than the chaos. does. And so the problem with business, especially when there's, you know, one of us or two of us or ten of us and we're getting started is it's so freaking chaotic. You feel like you're running around putting out fires all the time and the money feels out of control. And it, you know, so when you start putting it down and saying, okay, this is what we're going to do with money. And we're going to do anything else with it unless we come back and change our plan intentionally. And you say, this revenue is going to come in and this is what I'm going to do with the revenue. And, you know,

Then if something pops up, you can sit down and look at that and make an adjustment if you need to, but at least you've got a track to run on. That makes sense. And this research is interesting. Only half of small businesses survive after five years due to cash flow issues, due to not having good money management. So it seems like the budget is one of the keys to just staying in business and surviving. Well, it is because there's stuff that happens like people don't pay their taxes or they don't set the money aside out if they're doing a problem. and they're collecting sales taxes. They don't set their sales taxes aside, and then they come due, and you don't have them because you spend them on something else. And so this not having a plan

thing creates cash flow drain. It's usually not a profit problem. Sometimes businesses go out of business from a lack of profit, but most of the time they go out of business because taxes sneak up and hit them in the back of the head. They get too far in debt, and they keep, you know, they're out trying to outgrow their resources, grow faster than they have the money to go. grow with so they go into debt to do it. And they don't do a budget. They don't do a game plan. And so you put those three things together. You've got disaster soup, man. I mean, it's a problem. Yeah. And it's interesting. You brought up this idea of debt and the budget. And can those things coincide and how do you kind of plan for that in your budget? Let's say you have debt right now in

your business. How do you start paying that off? Well, what we teach folks to do in Entree leadership and we've never had debt in this business because we don't borrow money. But what we teach them to do is All right. With my budget, I'm going to set out a living wage that I take out of the business. What's it take me to live on? Not super bare minimum, but bare minimum. I mean, not beans and rice, but, you know, it's not $300,000 a year, but it's not $10,000 a year. So I'm going to take something out that I'm going to live on, and that's going to be my salary. And everybody else gets paid and all the expenses get paid. And what's left is called profit.

Now, what are we going to do with that profit? We're not bringing it home. while you've got debt. We're going to split that profit into two categories. We're going to save some of it for retained earnings, and we're going to put the rest of it on the debt. And so something like 80, 20, 20, 70, 30, 20, 20, going into retained earnings, or 1585, whatever. You decide the ratios, but the lion's share of your profits should go on your debt while you're building and retained earnings. Now, this is different than the baby steps that we teach in financial peace or in the total money makeover that you hear on personal finance.

So because retained earnings are necessary for survival and continually growing your retained earnings are necessary for survival in business. So we're going to just set a formula in place as we're going to live until we're out of death, though, we're not taking anything out of this business except our basic necessity salary. Yeah.

And it reminds me of how we dealt with the pandemic and COVID when it comes to budgeting. You know, you started putting some things in place and luckily we had those retained earnings to go, hey, if this happens, we've got this. If this happens, we got this. Walk me through kind of the mental process you guys looked at when it came to the budget and the pandemic. Well, we put a freeze on everything and said, we're going to conserve cash. We're going to hoard cash because we had really healthy retained earnings. But even at that, you look at our payroll and we're going to

burn through that if revenue stops. And we don't know with the pandemic. It was like, you know, we didn't know what we're going to happen with revenue. So if revenue slows or stops or the lines cross, meaning that the revenue gets below the expenses necessary to survive, payroll, those kinds of things, then we're going to feed it with the cash. And in order to get ready to do that, we just stopped doing everything. And we took all the money that we could find on that bottom line and threw it on retained earnings and built up a big extra pile of cash. We almost tripled our cash in a very short period of time. But all travel stopped, all events stopped, all of those expenses associated with all those things stopped. So we took all that money.

that would have been going out the door for things we were going to be doing and used it to pile up cash. And the good news is revenues never got below expenses. They did dip, but in some areas they disappeared. In some areas, they went up. But overall, we went up. And so we never really got down into that. But the game plan was then if we start burning through the cash, we're going to burn the cash down to almost nothing before we start doing layoffs or before we start asking people to take, go without pay. and long before that, leadership said we're not going to take pay.

So one of the things we did was we temporarily suspended or we were prepared to, we didn't actually have to do it. We were prepared to temporarily suspend leadership pay. Yeah. Our top tier team was willing to do that to hoard more cash if we started burning through it. But we never got there. So the idea was let's make a list of priorities. This is going to get cut next and then this and then this.

And you kind of had this worst case scenario planned out. Luckily, we never got there. Exactly. We had, you know, defcon five, right? I mean, you know, where are you going? One, two, three, four, five. These are the phases we're going to go through. And we shared those with the team.

We told everybody what we were doing. So that way that helped lower the stress and the crisis management of the situation. But that's a wartime budget, so to speak. In a peacetime budget, you know, what you're doing is you're systematically saying, I want to be very intentional with every dollar. The dollars that are coming in, I want to place them where I'm going to get the best rate of return. I'm investing in the future. I'm investing in the now, both.

And I'm looking for an ROI. And then the rest of it, I'm bringing home. Yeah. And it's interesting. You're talking about cutting expenses. And you think of that with your personal finance. Okay, I can go cut a subscription here. Whose job is it to look at the business budget and go, yeah, we really don't need to be spending in this area.

We can find a better deal over here. Is that, you know, the accountant? Is that the CFO? Or if you don't have those, is it just the role of the CEO? Even if you have the CFO and even if you're running a large, sophisticated operation, the CEO is supposed to be looking at the numbers. Anyone in leadership should be looking at your numbers. You should know your numbers.

If one of our SVPs or EVPs comes into a meeting and they can't tell me their numbers, they need to leave until they can know their numbers and come back because that's their job to run that area. And you can't walk around and not know what your revenue numbers are. Walk around and not know what your expense numbers are. And so I spot check stuff as the CEO of even something this large and multi-layered. To this day, they send me the payables list every week. before it goes out. Now, they don't wait on me to approve it, but I'll thumb through it, and if I see something I don't recognize or that looks a little weird, I'll just check on it.

Go, what is this? I don't know. What is that money? That's a lot of money for something. I don't even know what it is. And usually these days I find out of something to a technology, which would be a lot of things I don't know anything about, right? But that's okay. I ask. You know, it's my freaking money, my business, so I need to ask. And the good news is it makes everyone in accounting and in those business units know that I might ask about this thing, so they better have our justification for it. And it's not a micromanagement thing. It's a spot check to make sure that people are being very intentional with their money.

There's not accidental stuff going on. I discovered that a contractor we had, a technology contractor, was being paid this large number of dollars. I went, oh, my gosh. And I found that. I went, who is this guy? Why are we paying him more than so-and-so's making? I mean, this is a lot of money. And what happened was three different departments were utilizing them and pooling it together.

So each of them were looking at their expense, and it was all fine. But when you looked at the total, it was ridiculous. And that was that guy's last day once I found it. I mean, because it was a ridiculous expenditure. It was crazy. But they had not noticed it because it was broken into three different areas. But when you put it all in one, and I looked down and saw the number, I went, oh, my gosh. So that's an example.

of you're managing your business, you're running your business by looking at, you've got to know the tea leaves, man. I mean, you've got to look at the tea leaves to see what's going on in the business. And that's the CEO's job to be looking across things and I have that 30,000 foot view because some of the, you know, the business units or the P&L specifically may not have that global view. And you don't have to spend a lot of time on it. I spend 45, 50 seconds a week looking at that thing. And if I'm super busy, I don't look at it. That's okay. But it's, I've got that available. And of course I've got the full budgets. Of course I've got the meetings of the closing of the books every month.

We all meet, go over what happened for the month, and we look at what's projected in the budget for the coming month, the coming quarter, the coming year, the coming 18, we do a rolling 18, rolling 12 predictions. But again, my total time these days, and really over the years, is not, I don't spend 70 hours a week pouring over the numbers. I'm not the numbers geek.

But you can't run your business if you don't know what's going on. And the best way to know what's going on is you read the tea leaves. You can tell by looking at the numbers. Was there a time where you predicted something was going to happen in the budget and it went totally wrong? Was there just something that was way out of bounds? You remember a time that happened? Oh, yeah.

It's happened all the time. I mean, it happens, especially with new things because you don't know. If you're launching a new product or you're launching a new initiative, a whole new area, you don't know what's going to do. You're guessing, you know, I mean, it's the first time we've done a money-in-marriage event. What do we think we're going to sell? I don't know. Never done it before. I mean, here's what we hope.

But it's a guess. It's an educated guess, hopefully, but it's a guess as to what you're going to make on that top line. And then based on that, you go, okay, here's what we're going to spend on production, and here's what we're going to spend on the venue, and here's the payroll we're going to, you know, associate with this project and so on. And so, yeah, that's happened many, many, many times over the years. And, you know, what happens, too, is you learn these things the hard way because you get an outchy. Like, I remember, I don't know, we were still very small.

and we had a book that was selling very well out of our store. And so it went, it was a fabulous month. I mean, it went ding, ding, ding, ding, ding, ding, ding, ding, ding, ding, ding. And the guy running that department, the VP, got paid off of the profits. And so he got this fabulous check this month. Well, the shipping of all the books didn't come do until the next month. and so we ended up being in the red the next month in his department because he had this huge shipping bill and he didn't set the money aside from the month before.

So that's a time where we budgeted and didn't include shipping for that month and paid out all the dad-gum profits in terms of bonuses and then got to the next month and then me money. So, yeah, that kind of stuff has happened, but you don't discover that if you're not operating from a plan. Yeah. When you're operating on a plan, then you go, we'll never do that again. And guess what? We've never done that again.

That was probably 15 or 20 years ago that that happened. Yeah, it seems like you learn along the way where there's a lot of things you just have to learn kind of trial by fire and you go, oh, that stung. Let's not do that again. Exactly. And you're going to have that and you're going to adjust. But the longer you have a product line or service open, the more predictable it is. You should be able to dial in. I mean, you know, if we do an entree leadership summit, I mean, this would be our, I

eighth or tenth one, you know, we should be able to predict that one pretty close. We shouldn't be 25% off. We might be 2% off or something. And so it's not okay to be 25% off unless pandemic hits or something. I mean, you know, but on normal operating things. So if you've been operating a plumbing company, operating a landscape company for five years, you kind of know what spring looks like when the air conditioner's cut on or the grass starts growing, right? And you kind of know what fall looks like when you start wrapping up, the summer's over, you know, the heaters start to kick in and that kind of thing. You kind of know what your December is going to look like because you've had a few of them. If you're in retail, you know, you're going to make a lot of your money

from Thanksgiving till the end of the year, the Christmas season, right? It's not unusual for a lot of retail establishments to make 80% of the revenue or more in that short period of time. And so you know then what your dry season is and you know when the harvest is. But if you you've never been there, it's a guess. Yeah. But the more you do it, the more accurate it ought to become. What do you do when that thing doesn't go to plan? You're expecting the harvest and COVID hits and you go, oh, gosh, we were expecting all this

revenue coming in and now we don't have it. What's the next step do you take? Well, the good news is you realize it because you're operating from a budget. If you weren't operating from a budget, you'd just be going, I'll find out next month that this sucked, you know, when I get my P&L. But too late then, you're done. And so when we've hit that wartime budget, for instance, with pandemic, what we were doing is we went to a daily measure of revenue. We're measuring revenue daily and predicting, okay, here's what we originally pre-pandemic predicted, and here's what actually happened.

Oh, God, that's a problem, you know, or look at that. We're making some money over there. I wonder what we need to do there. And so we found things that were working and we poured gas on those and the other things that were disappearing, they were just disappearing. You know, people, you know, obviously live of income, just completely disappeared. It evaporated in 20 seconds there. The budget gives you, it reflects back at you what's going on and then tells you where to pivot to. This over here is working, so let's pivot to that.

This isn't going to work. It's gone. So there's no reason to pour a bunch of effort on that or cry a bunch of tears over it. We're in more time, but it's day by day by day. We're watching these revenues of these different areas. And then you can pivot like crazy. I mean, you can change every morning what you're doing if you have to. That's not the way to run a business, but in a wartime situation, in a pandemic situation, that's what we had to do.

But again, you pan back and say, okay, normal operating, we're seeing this trend line of this product going down or this service is going down. It's gradual, but, you know, in a few years it's going to have disappeared. So what are we going to pivot? We've either got to reinvent that product and do a new and improved version and, you know, get the marketing cycle started again on it, we've got to have a replacement product or service for that because that revenue in four years is going to be gone at this trend line. Yeah, reminds me, you know, a blockbuster or twice or us where you go, someone wasn't looking at the budget going, we got to do something different. Yeah. And at some point, they, you know, it wakes you up and you have a change of vision. Yeah. So how long should it take? Because we're talking about you're going to, you might stumble through it a little bit.

Is it like a personal budget where it may take 90 days to stick with it or is it different with business? I think preparing it, you're probably going to be better at it than you would be on a personal budget because you already have all the components. And again, depending on how long you've operated the business, you can tell very accurately what's going on if it's been a while. So no, it won't take that long. It shouldn't take 90 days to get it going. The first 30 days, you know, you may, you'll have some adjustments, but the big thing is to get in the rhythm of running your business properly, which means I'm going to do a budget and then I'm going to check the P&L next month against that budget and go, okay, how closely did we hit it? And then we've got to adjust.

So let's say I'm a new business owner. I haven't done a budget. How would you walk me through the different components of what I need to be looking at and writing down or, you know, using a piece of software to start thinking about this? You know, what the truth is is that if you're starting a business, you probably already have it in your head. You do need to write it out and you do need to develop a program here. but the, you know, okay, we're going to sell these widgets and we're going to sell them for $5, and we're going to sell 100 of them. That's $500 of revenue, okay?

And so, you know, our revenue prediction is this. And then how are we going to spend that? We've got payroll is usually the largest, if you've got payroll, if you're, you know, if you get 10 or 20 or 100 or 1,000 people, you know, it's usually your largest line item in your budget. You know, and you've got rent or whatever your bill. building cost is. You've got cost of goods if you're doing a hard good or if you're doing a service that's payroll usually in that case. So you just start going down through there. Okay, what are we going to spend on marketing and what are we going to spend on the production of the product and we have

to pay the light bill and whatever. I mean, you kind of have these things in your head. They're loosely there. But putting them down on paper gives you tremendous power over them. Instead, when they're floating around in your brain only as chaos, they have power over you. Yeah. That's interesting. When you comes to budgeting for a big purchase, how does that fit into that budget? Let's say I've got to get a piece of construction equipment that's 100 grand. You know, that's just more saving than it is budgeting. That's just saying, okay, I need a piece of construction equipment, and I can put $20,000 a month towards that, and it's $100,000, and so I can do it in five months. Or it's going to take me a year. It's $8,000 a month, gets me there in a year. How much can we put towards it? And then that tells us when we can purchase it. not, oh, we need it today and we're going to buy it anyway. That's debt. Yeah.

And, but what that causes you to do is predict out into the future. And the interesting thing is when you start spending dollars on your business expenditures that you've actually saved, you are better at it. You'll buy a different piece of equipment. You know, for instance, I get a, you know, we're building these studios, these podcast studios and these broadcast studios, both all through this building. And I get the, you know, the predictive budget in, and I went, oh, my God, you're kidding. We're going to spend what?

Because this equipment to do this crap is expensive, you know. It's cray-cray. And so, you know, I'm like, all right, I got to understand because I just got sticker shock. You know, I just fell over and passed out. Now, wake me up. And so, you know, but then you look at it and you go, okay, once you adjust it to, from what the engineer's wish list is, to what is a good idea that is a quality situation, not all the way down to where it doesn't function,

but somewhere, you know, some common sense adjustments to it once you understand what's going on, then you say, all right, that's the number. Now, where are we going to get that money? How long is it going to take us? And then, you know, so when are we going to build those studios? Are we going to do them one at a time? We're going to do them all at once.

Are we going to, how many of them are going to be ready when we move in the building? And then over the next year, we're going to build them out, you know, as cash flow, you know, and as the need is, there and those kinds of things. We don't need to build them all out. If we don't need them. Okay, then when are we going to get them done? And so you just start laying that out. And the same thing's true with any. That's a big expenditure for us around here. We spend a lot of money on technology on the hard boxes that cause this stuff to happen. And so again, that's like buying a piece of a construction equipment. It's like buying a service truck for your business. That's a big

purchase. And so you've just got a very few people can just do that in the month. Yeah. You can just go, but it's, you know, Christmas is in December, so we're going to save for Christmas a little bit of time. Rather than that, let it surprise us. You know, you've got a 200,000 mile service truck. You probably need to start working towards the next one, a replacement. Instead of waiting on the thing to lay down, and then you have an emergency. It's a predictable event that that truck's going to lay down. And so let's start saying, all right, five months from today, we're going to buy a truck, and it's $20,000. And so here we go. You know, we're going to save so much a month and get there so that we can do this at that month. So where does that money come from? We're talking about savings, just straight profits.

It comes out of your retained earnings. Okay. The retained earnings formula that we had earlier. And, you know, you can adjust that get out of debt formula a little bit for those five months if you want to. Say, okay, we were going to put 85% towards debt, 15% and retained earnings. Well, that won't, we still got to get the stinging truck. We're going to have more debt, right, when it lays down.

So, all right, we're going to adjust that down to 75%, put that 10% and save up the money for the truck. But it's just a savings program inside the business. to purchase your, to do your large purchases. And we know this budgeting stuff works, which is good news. And a great example of this is the building we're sitting in right now. I mean, this was a $70 million building paid for in cash. Much to people should agree with say, oh, Dave took out debt to build out.

There's no way he did it. And you did it really through budgeting. Yeah, that's exactly what we did. It's a very large purchase with a lot of zeros and a lot of money. It blows my mind emotionally to this day. But we stood back, and the first thing we did was he closed on the ground. which was $10 million, the first 47 acres we bought for this campus. And then we said, all right, we're going to sit down with the CFO and said, out of our profits,

how are we going to get there and when can we get there? And we didn't start the building until we knew that we could meet the cash obligations of the construction budget. And so that, of course, we didn't have it all saved up before we started, but we knew we could get there unless something blew up. And if something blew up, we would have just stopped construction until we, if there had been a pandemic that shut down our revenues in the middle of it, we would have just stopped construction. As a matter of fact, we had the other building, the second building, going, another 50 million during the pandemic. And one of the Defcon two, Defcon three things was to stop construction over there. We did not end up stopping construction, but we could have to stop that drain on the budget.

Yeah. You know, I'm going to meet payroll before I continue construction. And so, you know, what are your priorities? they're there. And you talk about how we move at the speed of cash. And that building is a great example of how we move at the speed of cash. But a lot of people may go, Dave, I'm not going to have $70 million tomorrow. Do I need to rent right now? And there was times early on in the business where we were, you know, renting space out as we grew and outgrew. But you didn't go, hey, we need to buy a building today and I'm willing to take debt on it. It didn't work like that. So how do you know when to rent

versus buy something? Is it just timing and cash flow? When you have the money is when you can buy, number one and it takes you a little while to do that the first time we did close on the building was the original financial piece plaza was five million dollars and that was when we rented it for five years with an option to purchase and when i started that at the beginning of that five years there was no way i was going to have five million that was a pipe dream at the time it was like yeah but if if god gives us the money we'll buy it but if he doesn't then we're not going to buy it we're going to keep being a renter that option will just expire and um the great news is the building went up in value to 12 million during that five years, and we were able to close on it at the last moment. We

scraped out of the nickels out of the corner of the couch and closed on the five million. So it was a great purchase because we, you know, made $7 million the first day on it in terms of net worth. But two years before the option ran out, I didn't know if we were going to make it. Do you think there's a lot of business owners out there who kind of have, I guess, the childlike mentality of I want the toys and I want them now and I don't want to do it the day of way? I'm just going to go into debt and get that nice, you know, the John Deere, get the, the Mercedes model and just kind of go all out as the business owner? They're all over the place, and they're the ones that go broke. Because here's what happens. The more debt you add to your

situation, the more unstable your situation is. Debt equals risk. Even people that believe in debt know that debt equals risk. Bond issues are debt, and so if you're doing a stock market analysis of a publicly traded company, if it's covered up in bonds, that's risk. And it makes it devalues the stock because there's too much debt. And so the more debt you add, the more risk. And no debt is, you know, is obviously gets rid of a ton of business risk. Hell yeah. Case in point, again, the pandemic, we're sitting here in paid four buildings with no rent obligation at all. I mean, I'm the landlord so I can not require rent from myself, right? And if that was one of the things we would have done if we'd have had to, is not, you

the landlord doesn't get paid, me. And so we were in a strong cash position and no debt. That changes the whole budget in a wartime situation. And it changes the whole budget in a prosperity situation because it got a lot more margin to go and grow with. Yeah. And it helped us avoid layoffs. We didn't lay off a single person.

No. It never got to that point. I don't know that it ever would have unless there was some kind of DefCon five-level situation, which is incredible. So at what stage does the business owner go, all right, I got to hire someone to do this budgeting stuff. I got to hire someone to do the accounting part. I was one of the first few people I hired because I hate doing it. And you're a

numbers guy. I'm a numbers. I'm a number. I like reading the numbers. I don't like creating them. Yeah. The detail that needs to be done to lay out the thing. And so now I helped create the budgets for a long, long time. You know, I looked over their shoulder and said, this is what we're doing. And I would be very involved in the adjustments and so forth. So, but the actual doing payroll paying the bills, doing the expenses, doing the payables, you know, hitting the receivables and looking into all that stuff and the actual down in the weeds of that, I delegated that very, very, very early because I don't want to screw with it. I wanted to be doing business, not counting beans. I remember just this week, you told our accounting team, you're weird and I love you. I'm so glad

that you all love this stuff and love sitting on these numbers. Exactly. That's fantastic. So what encouragement would you give the business? owner who maybe is where you were 25, 30 years ago. They're the treadmill operator. Maybe their budget is looming every month. They're going, oh, crap, I got to make payroll this Friday. How do they get some traction and get to that next stage with budgeting? I think you just sit down tonight and say, I'm going to predict next month. And I'm going to do it on paper. I'm going to predict the revenue and the expenses, and I'm going to create a little one-page spreadsheet, and this is what it is. It doesn't have to be rocket science.

But you've got to get, if you've been driving only looking at the rear of your mirror and then wondering why you're running into stuff, you've got to start looking out the windshield. The interesting thing is it will give you peace. Your probability of survival goes way up when you're doing a budget. And it literally moves a whole bunch of chaos out of the business. The sense of I'm, all I do is put out fires all day long. And it's because there's no plan. We're just running from thing to thing to thing to thing. And I've been there.

I remember exactly how that feels. But when you get behind the wheel and start looking out the windshield, that's sitting down and doing the budget, you've increased your chance of survivability, profitability, you increase your peace of mind, the sense of margin and the angst and the anxiety around running the business. It all goes way down when you start doing this plan. So planning is writing out your budget is essential to get it. off the treadmill. Yeah. It's funny. As you're talking about that, I think of the people who come to our lobby and do their debt-free screams. And you always ask them, hey, what's the key to this whole thing? And they say, Dave, it was the budget. Yeah. Right? And it was making the plan. It was having the discipline. And I found that it makes them more discipline in other areas. And I think about the business owners out

there listening and how a budget could not just make them more successful business, but make them a better leader. Yeah. But it's the same thing planning with your time. If you get home at the end of the day and your spouse says, what do you do? I have no idea. I'm just, we're exhausted, you know. It's because you're not spending your time on the things that are the most important. And so, you know, it's the old-fashioned to-do list, the most important thing, down to the least important thing. And I'm going to work that list all day long. That way, I'm only working on the things that are the most important. And what exhausts you is working on crap that doesn't matter. Yeah. And that's part of that delegating. As you grow in your business and you can start to see ahead, look through that windshield, you can start to go, all right, we're in a good

place because I've budgeted, I can hire someone to do that now. Exactly. Take that off my plate. That's fantastic. Well, Dave, I appreciate the way you've helped millions of people take control of their money personally and how you've helped our Entree leadership community do the same for their business. I appreciate your time. Thank you, brother. Well, you heard it from the man himself. You need a budget for your business, but you might still be asking, how do I do that? How do I put that budget together? We'll have a conversation about that and some budgeting dues and don'ts right after this. In our second conversation, I sit down with Jeff Williams. He's our senior executive director of finance, and he unpacks the components of a good business budget and how to get

started. Jeff, welcome. It's your first time on the Entree Leadership podcast. How does it feel? Feels good. A little nervous, but it feels good. You're going to do great. Thank you. So you're the senior executive director of finance. That is a, that's a lot of title. It barely fits on a card. But it makes me think this guy knows something about budgeting. I know a little bit. I've done it a few times in my career, yes. Well, okay, hopefully Dave's not listening going, oh gosh, we hired the wrong guy. Well, I want to talk today about budgeting for business. There's a lot of business owners out there, and I doubt budgeting is at the top of their list when it comes to favorite things.

Yeah, it's not something a lot of folks look forward to because a lot of times you end up doing things that you don't do every day, and it takes a while to get good at it. And so some folks, when they go to their budget, they end up finding out things about their business, maybe they didn't want to know. Ooh. So, yeah. But they've got to have that clarity. They need it, yes. And a lot of business owners, it seems like one of the first things they want to delegate is the finances.

Yes. They're like, this is not, I didn't get into business to be an accountant, right? Yeah, because it's, again, a lot of it's not fun. It's stuff that you've got to know where every dollar is going, how much is going to be coming in, where's it's going to be going out to. And are those the right expenses we should have? And is that the right investment we should be banking? So sometimes you've got to be the bearer of bad news. It's a big deal, but you've got to be looking at this thing.

Yes. So let's talk about making, let's say I'm a business owner and I'm making my first real budget. I've kind of been on the treadmill. I've been making it. We've had revenue come in and the expenses are going out and we're all good. I'm making payroll. But if I'm going to make a budget for the first time, where do I need to start? You need to start with your financial statement, your P&L.

And different people have different views of what that looks like. from a small business standpoint, just starting with your checking account and seeing the dollars coming in and the dollar is going out is a good place to start if you don't have a formal way of preparing a financial statement in a spreadsheet or something like that. It doesn't have to be electronic. It can be handwritten. But just some way of knowing over a period of time what's coming in and where is it going to make sure you have some sort of accounting for every single dollar so that you can plan better. So it starts with kind of this report saying, okay, where are we at? Where are the expenses? How much income is coming in?

Hopefully you know that stuff. But for some business owners, they're learning stuff for the first time, like you mentioned earlier. So we've got the P&L statement, but that's still not the budget. So once we have that P&L statement, we know what expenses are going out, we know what incomes coming in. Where do we go next? What you want to do next is you want to use that information, that rearview mirror look of the financial position of your company, and use that to project what the future might look like. If you are going to do it on a monthly basis, if you are looking at the most recent months financial information, use that information and your knowledge of what happened in that month to project out, okay, well, what should I expect to happen the next month? If I know that I'm going to have the same kind of business in the next month that I had in the prior month, then I know my income should be similar. And you use that knowledge that you have with the financial information to project out what your next month will look like. So it's a super educated guess on what will happen. Exactly.

And hopefully we're on track when that hits. Exactly. Okay. Now, there's a lot of other pieces in the budget, and depending on the industry, the business you're in, if you're service-based or product-based, things could look very different. Yes. Right. But give me some examples of what expenses might be listed in that budget. The two big expenses that anyone's going to have in most any business are cost of goods.

What are those things that you're selling? The cost of goods or services that you're selling. what are all the costs that you have in terms of delivering that product or delivering that service to your customer? So that's the first one. The second one is labor, and that's true here. Ramsey, that's true. All of the businesses that I've been out of my career, those two pieces make up 60 to 70 percent typically of the expenses that you're going to have between cost of goods and labor. And labor in layman's terms, we're talking payroll here.

We're talking payroll. We're talking salaries, payroll, payroll taxes, anything commissions, anything related to the manpower, that it takes to deliver those services, those are the kinds of things that would be in there. Okay. And I know there's fixed expenses and there's variable expenses. Walk us through the difference between those and some examples. Sure. Fixed expenses are those by definition of the word. They don't vary over time. The example would be rent. Typically, if you have rent on a space that you're renting for your business, that's a fixed amount of money. It might escalate every five years. Some of it may escalate every year. But month by month is pretty much the same. That's a good example.

of a fixed expense. A variable expense would be something like hourly labor or hourly wages. It's based upon how many hours of labor you deploy into your business to deliver those goods and services. When you're really busy, that number may be higher. If you are not as busy and you are able to let people go early or cut back their hours, then that expense will be lower. It varies with the activity. So those are really the differences in those two expenses. Now, where would, for example, utilities fall under? Utilities is one of those things. It's a bit variable. but it's not going to vary a lot. It's almost like a combination of a fixed and a variable expense.

You're going to operate within a fairly narrow window unless you're comparing like springtime to wintertime. Like here in Tennessee, my air conditioning bill is way higher in the summertime, and my heating bill is a lot lower in the summertime because I heat with gas. And so they may vary over the course of a year. But month by month, if you can measure that seasonality, month by month, it's going to vary. It's a very small range. You know it's coming every month. You know the range it's going to be.

You always need to plan for that. Now, we've got to talk about profit. It's in the tagline of this podcast. We want these business owners to grow themselves, their teams, and their profit. So how do you project something like net profit? And are there any kind of guardrails or framework that you need to use to get that number? A couple of things that I would think about in projecting net profit is it's important to measure that over time. And to measure it month by month over a longer period of time.

And the longer you do that, measuring that as a percentage of the revenue coming in is a good barometer. to know, okay, have I got everything accounted for? Is there anything I'm missing? If this year in July, my net profit was 10% of my revenue, and last year it was 25% of my revenue. Wow, what happened? That would cause me to go back into my financial statements and look at what happened this year versus last year. So using those comparatives helps me think about what profit I should expect. But it's also, I mean, we are in this to make money, right? You run these businesses to make a profit. and so you want to look and see if am I not getting enough? Do I need to raise my prices?

Am I spending too much money in labor? Am I spending too much money in rent? Is this building because of the way my sales are going now? Am I at a place where I can't afford this building anymore? All those kinds of things should help you as you evaluate profit, should drive you back up into the financial statements or into your budget to decide, okay, maybe I've gotten to a place where I can't afford this. Conversely, it could be, hey, you know what?

I'm making really good money. Maybe I need to invest more back in the business to grow the business. business even bigger than it is today. All those kinds of things are decisions that you come to in your evaluation of your profits. Yeah, it feels like there is a lot of decisions here to be made and there's no one size fits all. There's no formula to tell you what needs to be on this list because your business is unique to you. And so how do you go about when you're looking at this budget going, all right, I know we're running low on this thing. We've got to order more or we've got to make this higher in the next six months to get us to where we need to be. How does that all fit into the

budget when it comes to kind of the future goals? Well, what I would say in answering that, George, is these are all tradeoffs. These are all decisions that are going to have some implication either in the present term or in the future. And if you are planning on this new hire, say in six months, you've got to factor in the totality of the impact that that new hire will have. Okay, they're going to have labor costs. You may have to have to pay somebody to help you recruit them. So there's going to be costs before you ever get them in the door. Then once they're in the door, there's going to be some costs, but there shouldn't be some benefits as well. Those new hires should be either working on things that the customer cares about or they need to

be supporting someone who is. And so when you think about it in those terms, there should be a payback and that and you would build that into your revenue or you would build that into savings and other expenses in other areas. So there should be, it's not a deal where you just add for the sake of adding. There should be some sort of an implication from that addition. Yeah, that comes back to that ROI. Return on that investment. I've heard Dave say this before, if he could put every single person here on commission, he would. And that makes sense because it's one of those things where you eat what you kill and you're going to go out and it's going to make people hungry. And I think that's a great model to have

if your business can support that. But you wouldn't want to have, it would be a deal where, wow, man, I'm saving a lot of money on commissions. Well, that typically means you're not getting in the top line. So you've got to be careful of that. Okay. So we've outlined the budget here. Is there anything we missed when we're talking about looking at the P&L, kind of the report, the rear view and then projecting that monthly income and then writing down all of the cost of goods, the labor, the variable expenses, the fixed expenses, and then projecting the net profit. Because that's the end goal. It's going, okay, let's do all this math to go, are we going to have more money this month than we did the month before?

Exactly. That's really the main parts of your budget should be to get to that point. And then you've got some decisions to make around, do I need to go invest something? Do I need to change the salary I'm paying myself? Do I need to put some money aside for taxes? There's a lot of other implications once you get to that point that you can only do that, though, once you've been through that process. So we've got the budget down. I want to talk about some budgeting, dues, and don'ts. Because I'm sure in your day, you've probably made some mistakes. You've probably seen some mistakes get made when it comes to finances. What are some of the don'ts? Let's start with the negative side so we can end on a happy note here. What are some of the don'ts when it comes to budgeting?

I think one of the things that I see companies fall into is they make these wild assumptions on what the future, looks like. And they do it in such a way that it makes the review mirror look like, oh, that was just an anomaly. We're going to be way better than that in the future. And they build all these plans out. They hire extra people or they make investments and stuff only to find out that that stuff that they thought was going to happen, didn't happen. And so you've got a plan for what if our plans that we have don't work out. So it sounds kind of negative and it's intended to be that. Make sure that what you're doing is realistic. Don't go out there and throw these. expectations on your business that you only really have a realistic chance of hitting maybe once out

every 10 years. If you do that, you can end up hiring more people than you can really afford, and you end up having to lay people off, and nobody wants to do that. Or you have to end up riding off or selling a piece of equipment that you bought that your business really couldn't sustain absent those high-flying assumptions coming true. So don't do that. So it sounds like there's kind of a fiscally conservative approach here of saying, like, hey, we can dream big. How do you balance this? You know, we have a lot of B-Hags around here, big, hairy, audacious goals. And Dave says, hey, your business is going to hit this number next month. And they go, oh, my gosh, how are we going to do that? And then they go figure it out.

And you go, see, I knew you could do it. That's one side. But then the other side you're saying is we also have to be very realistic. So how do the two kind of marry each other to where you're not a negative Nelly over here, but you're also not too far in the future we go, I thought this was going to be the case and it didn't pan out. I think the basics of your budgeting have to be centered on some sort of goals? What is my goals for growth in the next X number of months or years, whatever it may be? And am I making progress toward that? In the past, we have used about a 70% chance of hitting a budget being a good barometer, 60 to 70%, meaning I'm 60 to 70% confident that we will hit that number pretty regularly. Going above that, if you go like 80 to 90, then you're probably not stretching

yourself much. If you go way below that, then you've probably got something that nobody's going to even they're always going to go, oh, that's great. He thinks we're going to do that, but we're never going to hit that. So getting somewhere in the middle there, above 50%, you don't want it to be a coin flip. Yeah. But you want to be confident. That way you exude that confidence to your employees. But it also gives you a little bit of a challenge. It's not a layup for you. So that's the way I would say we would balance it out. You want to be a little bit beyond your skis when it comes to the goal. It should be a little bit uncomfortable. You don't want to be too far. Yeah, that's really good. Now, any other don'ts we need to worry about when it comes to these finance fauxs. Don't forget about taxes. I mentioned that earlier. We don't want to forget about taxes. You definitely have to plan for taxes because the government's going to ask for their share. So just like all businesses do, we're an LLC. And so we have to set aside money for taxes just like everybody else does. And we use the same process that I'm describing. We set budgets. We do forecasts on what we think that's going to end up looking like. And based upon those numbers, we have to set aside a certain percentage of that for taxes. And we build that into our cash flow budgets. Well, let's go positive now. We've got a saying around here. We hear it every month from our CFO, Mark Floyd. He says that profits are created when revenues go up and expenses go down. And then he reminds us that we're all self-employed.

We've got a self-employed mentality around here. So what are some ways that the business owners listening can go, hey, what are those costs I can cut? And where are the opportunities for growth in my revenue? I alluded to this a little bit earlier. But the way I like to look at it, George, is what are those expenses that I have that are the half-to-haves versus the nice-to-haves? What are those that if I don't spend this money, my customers are going to feel it. And they're going to give me feedback on that. If it's not an expenditure that is helping my customer or making the product that I'm delivering better, then it needs to be supporting someone who is doing that. And if it's not in there, then it's on the table to be cut. It's more of a nice to have versus a have to have.

And so that's something I think that we preach here. You also want to be mindful of some people, I know small business owners will take and they'll say, well, I'm not going to fix this truck this month. I can go another month. I'm not going to do the maintenance on it that's required. It's just, it's just too expensive. When you defer stuff like that versus going ahead and biting the bullet and doing it on a regular routine basis, the cost of replacing it down the road is going to be way higher than it is today. So go ahead and use today's dollars and bite the bullet. But you've got to balance all that with cash flow. What is my cash position today? Can I afford to do this? If I don't do it now, am I going to end up being able to pay 10 times that number down the road to replace that piece of equipment? Or am I going to have to replace it earlier than I would have if I had maintained it?

So those are some things I think that proactively, if business owners do that, they'll in the long run see their cash flow maybe much better. Yeah, it reminds me of getting the cavity filled instead of waiting and saying, I'll get that down the line, and then it turns into a root canal. Yeah, exactly. It's 10 times the cost. So that's my analogy to put the cookies on the bottom shelf. I like that.

So I can understand this stuff. You know, you talk about deferred expenses and retained earnings, and my head explodes. Yes. So are there any other areas that may be an example that we've cut a cost when we went, hey, who knew? We saved $100,000 by, you know, switching the coffee at the coffee bar. We like our coffee around here. Are there any examples like that that you can go, hey, if you're a business owner out there, think about these things that you may not be thinking about?

I think that one of the things that would come to mind on that question is things like that you just, describe coffee. I mean, I've seen companies do that or they decide, hey, you know, we can save money if we use this quality of product versus this better quality of product that our customers have come to expect. We can save a few pennies a pound if we do this. Well, they do that, and they lose customers because the customers could tell the difference. And if you do those things that are customer facing, if you try to save money on those things that are customer facing without spending a lot of time, effort, energy, and knowing what's your customers think about that. If you don't do that math and do that work up front, you can really hurt yourself because if you allow

the customer to go look for it somewhere else, they're going to stay gone for a long time. It's really, really hard to get them back once they leave. Another example is on commissions. I've seen people go, well, you know, if we just cut this commissions plan and instead of it being 10% of sales and we make it 5% of sales and we raise their salary to make up the difference, That sounds great, but a lot of times you find that they're no longer hungry. They're paid whether they go out and raise the sales or if they don't now. You have to be careful of that.

You've got to keep that balanced and always be mindful of what are those things that are customer facing and how can you continue to give the customers the value that they desire. Yeah. An example that I feel like should be in the never column is going to the one-ply toilet paper to save some money. Because you've got to think about the team too. But you're just twice as much, don't you? That's the truth. You're not saving anything.

No, not at all. You think you are, but you go through more roles. But you're talking about the customer experience and making sure that we don't skimp and then hurt the customer experience. But there's also an element of team morale and team culture. And we spend a lot of money to keep the team happy. Yeah, we do. We do a lot of things here that I've never seen done anywhere else. They're all done for the purpose of making sure that our team members know how much they're cared for, how much their lives matter, their families matter.

And those are investments that will pay dividends forever. I think we see it in our turnover rates. I think we see it in the way the teams interact with each other. it's just awesome because they know they can't get this anywhere else. Absolutely. So when it comes to this budget, how often are you looking at this thing? Is it once a week? Is it once a month? I've got kind of a long answer to that, but I'm going to try to keep it short.

I think the length of time or the period of time over which you look at that will vary the longer you do it. Early on, you're probably going to want to look at it maybe even weekly. Just to get the feel of the routine of the cash coming in and the cash going out, getting used to that. And once you've done that for a couple of months and you feel like you've got that flow, right, then you can maybe move to monthly, sitting down with your leadership team, reviewing it monthly, understanding what went on, what went through in terms of the sales coming in, the expenses going out, as you spend more time with your team and you look at the financials the way we talked about compared to the budgets over time, you'll probably

reach a point where you can do that more quarterly. I would not go a lot longer than quarterly in terms of evaluating your plans. Because again, now you've got the last three months to look at from a seasonality standpoint that's usually about as long as I'd want to go and then help you project out the next quarter or even a few quarters later here at Ramsey we we do a rolling 18 month budget and so we're looking out six quarters in the future but we've got 30 years of history we can use to help us understand and project off of and so I would get to a place to where I would be reviewing it quarterly but again the important thing is if I'm the owner I'm not just sitting in the room by myself looking at this stuff

with my family or my spouse or whatever I'm in the room with my leadership team and with my finance team or whoever's there with me to help me, and we're going to walk through this thing together. And we're going to make some decisions. We're going to come to some hard decisions sometimes that makes everybody feel like they're part of the team. Yeah. That's super important to get the leadership team involved. Yeah. So what final encouragement would you give to the business owner who's got to deal with this stuff? They've got to fight the day again tomorrow, and that budget is a huge part of it. I think a couple things. One of the things I didn't touch on earlier, but I think it's really

important that you remember that why you're in this business. You're in this business to obviously help your community, help your customers, help your team members, but you're also in it to make money and you're in it to pay yourself. And I think it's important that you do that. You pay yourself a comfortable living wage, not something that's exorbitant or a big weight on the business, but it's also something that you can live comfortably on because you're the owner and you're in this for a reason. It's not just that you're in it just to make money, but it has to be a part of it. So make sure and do that, but plan for that. Plan for that into your, always put that into your budget. Always make sure that you take that into consideration because it is part of the cash that's going

out of the business. Well, Jeff, I love your heart around this stuff to help the business owners out there. And I love how smart you are when it comes to the numbers. I'm so glad it's you and not me. So thanks so much for your time, hanging out with us on the podcast and sharing your wisdom. Thanks, man. Appreciate it. What a great Entree Leadership podcast debut from our friend Jeff Williams. As Dave and Jeff both talked about in today's episode, you need a budget. But what financial reports should you be keeping an eye on? The Entree leadership team has put together the six financial reports that can save your company. To get this free guide, click the link in the show notes. Hope you enjoyed today's episode of the show. If you did, leave us a review and subscribe so you

don't miss the next one. And if you're a small business owner with two to 200 team members, we'd love to hear what you think of the show, what you like, what you don't like, and what we could do better. Give us your feedback by clicking the link in the show notes to schedule a call with Tim, our producer. If you want to keep up with us on social media, you can follow us at Entree Leadership. This episode was produced by Tim Hull, edited by Jacob Harrison, and mixed and mastered by Will Rutter. I'm your host, George Camel, and on behalf of the entire Entree Leadership team, thanks for listening. Until next time, keep learning and keep leading. If you enjoy this podcast, you should check out other great podcasts from the Ramsey Network, like The Ramsey Show.

We want you to take control of your life and money once and for all. I'm Dave Ramsey, and along with my co-hosts on The Ramsey Show, we'll give you straight talk on everything from budgets to career to relationships. Join us as callers from all walks of life, learn how to get out of debt, and start building for the future, and how you can too. Listen to the Ramsey Show, wherever you listen to podcasts.