Have you ever tried to create a budget but struggled with coming up with the numbers that go into the budget. Well, if you have ever had this problem you have come to the right place for answers. In my consulting practice, I find the problems most people have in building their first budget is determining where the numbers should come from. When making a personal budget you have had enough experiences to know how much you spend for food, clothing and shelter in one month. However, we all know that a business is more complex than managing your personal affairs.

An activity based budget is one way to address the issue of “where to start from”. To use activity based budgeting, you start by analyzing your business and documenting all the activities that add value to your customer. For instance as an accountant I add value to my customers by:

• Increasing the expertise and knowledge I have – so education expenses should make a good portion of my budget
  
• Good customer relationship
  

Just to mention a few.

Using an activity based budget allows me to eliminate non value added cost to my business. What is a non value added cost? A non value added cost is costs I incur in my business whose end results do not increase my client’s satisfaction. My goal as a lifestyle entrepreneur is to make profits so spending time or money on things my clients do not appreciate does no good for anyone.

Also, activity based budgeting helps me come up with more dependable numbers when planning my budget.

Let’s do a quick rundown of how I develop an activity based budget in my practice.

Step 1: Identify my clients

Here at Lifestyle C.P.A I serve three types of clients namely:

1. The consulting client: these are the type of clients that are more interested in building a long term relationship. They seek out advice and try to implement my recommendations
   
2. The task based client: these types of clients just want tasks done. For instance a client only interested in bookkeeping service or training.
   
3. The trouble shooting client: These types of clients only seek me out when they cannot figure something out. They pay me a onetime fee to figure out a problem they are having with their accounting system.
   

It is a no brainer that I want to ensure that each of these types of clients is profitable. Also, over the long run I want to ensure that my consulting clients get the best rate to keep our relationship going.

Step 2: Figure out all the ways I add value to my clients

There are four levels of activities I must consider when using activity based budgeting for my consulting business:

1) Unit level activities: a unit level activity is an activity I have to do for every client. For example every client has to receive at least one email from me

2) Batch level activities: a batch level activity is one I perform in batches or groups. For example sending a news letter to a group of clients

3) Service sustaining level activities: are those I do to make sure I stay in business. For example marketing, customer service

4) General operations level activities: are those that I do for general administrative purposes. For example keeping good records of what happens in my business.

Classifying my budget into these four levels helps me better identify my cost drivers. My cost drivers are the factors that increase my cost at each level of activity. More likely than not, my unit based activity will go up as the number of my customers increase. Next, I break down the four broad levels into smaller levels of activities and identify relevant cost drivers

Unit level Activities:

Unit level of activities requiring CPA time (CPA time is the cost driver)

• Contract:
  
• Consulting session:
  
• Research and analysis:
  
• Final consulting session
  

Unit level of activities requiring bookkeeper time (Bookkeeper time is the cost driver)

• Bookkeeping services
  

Batch level activities

Administrative batch activities requiring administrative time (Administrative time is the cost driver)

• Trip to the post office to mail letters to several clients
  
• Sending monthly news letters
  

Batch level activities requiring bookkeeper time (Bookkeeper time is the cost driver)

• Training
  

General operations level activities – Bookkeeper

General operations level of activities requiring bookkeeper time (Bookkeeper time is the cost driver)

• Billing
  

 Service sustaining level

• Marketing
  
  • Marketing campaigns ( Number of campaigns is the cost driver)
    
  • Pay per click ads (Number of clicks is the cost driver)
    
• Education
  
  • Seminars and conferences ( Number of courses is the cost driver)
    

Once I figure out what drives cost for each level of activity, I can estimate the unit cost per cost driver to come up with a total cost for that activity.

See below for an illustration of how that will work:

Revising my budget is so much easier when I use activity based budgeting. At any point I can change my cost driver quantity which will automatically update my estimated budget.

Also, I can use this budget to help determine an appropriate price to charge to remain profitable business.

I have included a blank worksheet for your pleasure (ABC-Budget).

Please leave a comment below and let me know of any questions you have.

I will love to help get you started on building your activity based budget.