Budgets are planning documents. It’s always good to have a plan – but it’s even better to add risk protection in your plan. If your company has at least a modest surplus, it’s time for risk management.
How to Reduce Risk in Your Budget
Calculate your bad debt from last year. Bad debt is fees not paid for service, pledges that were not paid, government contracts that had a clawback, etc. It’s money that you expected to receive in your budget, but it never arrived.
Add an amount of bad debt as a new expense account in this year’s budget. It will be similar to last year’s total amount of bad debt. Charge the budget entry each month this year in your general ledger (debit expense and credit a new contra account in the Accounts Receivable). When the Smith family doesn’t pay that $200 bill, you can use the savings from the contra account (debit the contra account and credit income) and your operating budget doesn’t change at all. Mischief managed.
Sudden worker’s compensation insurance bills are very similar if your work force is growing. Add an expense account and a contra account to plan for a sudden bill.
Unexpected maintenance on leased equipment charges such as extra use of copiers, overtime minutes on cell phones, etc.
Unemployment claims if you use the direct reimbursement method offered to non profits in some states.
Only add these budget entries if they are large enough to be material. Adding $100 contra account for extra cell phone use is more effort than it’s worth.
These accounts take the unknowns for this year and give you one more tool to manage risk and sleep at night.
Monitor the contra accounts yearly and reduce unreasonable balances. Since they are balance sheet items, they just continue to grow if the risks don’t actually occur. Some clever directors add vacation expenses in that trip to the Caribbean by charging the contra account and hoping the Board doesn’t notice.
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