The YNAB Approach to Budgeting Uses Real Numbers So You Can Make Real Decisions
Today we’re continuing our series on law firm budgeting. Our series started by explaining why traditional budget forecasting is for fortune-tellers, not lawyers. Instead, lawyers should implement a budget earmarking system to help them make great financial decisions for their firms. Then, we took a look at one such system, Profit First. Today, we’re looking at another budget earmarking system lawyers use to turn poor cashflow into abundant profits, and that’s YNAB.
YNAB is short for You Need A Budget. Although the earmarking concept is similar to that of Profit First, YNAB is different from Profit First in a few ways.
Some of the Key Differences Between YNAB and Profit First.
First, YNAB is software-based. Whereas Profit First just requires a few bank accounts, YNAB is a clever software program that allows you to manage your money without all the separate bank accounts; the software does the earmarking for you. This can be nice because you don’t have to spend time every two weeks logging into your online banking and making transfers like you’d have to in a Profit First model.
Not having separate bank accounts also means that you have more wiggle room when cashflow is tight. For example, if your credit card bill is larger than expected, then it could overdraw the Opex account in a Profit First model, but in a YNAB model, our other money remains available in that same bank account to avoid the overdraft.
Next, because YNAB doesn’t require numerous different bank accounts, that means we’re doing our earmarking on paper, and not with real money. So for people who need to see money physically move from one bank account to another, Profit First is often a better concept. But for those who can work with numbers on paper, then YNAB is great because you can be a lot more detailed in your earmarking.
What Does A YNAB Budget Look Like?
So let’s see what YNAB looks like.
Here’s a sample screenshot of YNAB. As you can see, we have our bank accounts on the left, including credit cards, loans, checking accounts, and savings accounts. Then, the actual budget is in the main section in the middle.
That middle section is where we allocate money to different spending categories.
So How Is YNAB Different From A Traditional Budget Forecast?
So far, our YNAB budget looks a bit like a traditional budget forecast. We have budget categories, and we have numbers in each category, just like a budget forecast would have. To turn this into a budget forecast, all we’d have to do is plug essentially random numbers into our budgeting categories, based on guesses of what we think our income might be. Then, when our income doesn’t meet or exceed our guesses, we’ll find ourselves in a cashflow crisis.
And here’s where YNAB shines: We won’t plug just any numbers into our budget categories, and we won’t make any estimates of future revenue whatsoever. See that big green box at the top of the screen? That’s how much money we’re allowed to put in our budget, because that’s how much money we actually have. In other words, YNAB is budget earmarking because we’re allocating money we’ve already made, whereas budget forecasting would have us allocating money we may or may not make. By allocating real money we’ve already put in the bank, we avoid the risk that our income is lower than expected, causing a cashflow crisis.
What Does A Healthy YNAB Budget Look Like?
A healthy YNAB budget is always green. Take a quick look at our screenshot above – see how we have some budget line items that are red, because they’re negative? Our job is to keep not only that box at the top, but also each line item, green (with positive numbers).
To do that, we basically take money out of our green box at the top, and we put it into the lines below. Here, we’ve taken the firm’s $18K that was in the green box at the top, and we’ve allocated it among our budget categories. So now, it’s all green:
Now, when it comes time to make a financial decision for my firm, the decision is simple. I log into YNAB, I check the balance in the budget category that relates to whatever financial decision I’m making, and I see if I have funds available in that category to cover my expenditure. If so, I can go ahead and make my purchase. If not, I can allocate more money from the green box at the top, or I can wait a few months until I’ve built up the funds for that purchase. In any event, so long as I’m keeping my budget green and only spending money that I have already earned and earmarked, m my firm will never have another cashflow crisis again.
How Do I Successfully Implement YNAB For My Firm?
If you’re thinking about trying a budget earmarking system, whether that’s Profit First or YNAB, there are a few things you can do to set yourself up for success.
First, make sure your accountant or bookkeeper knows what these are, and how to support them; also make sure your accountant or bookkeeper is willing to support your preferred budgeting method, because not all financial professionals will.
Second, start with solid numbers that will allow you to set realistic goals and meet them. We recommend doing a budget and spending analysis prior to entering your YNAB or Profit First allocations, to make sure your numbers are both realistic, and also likely to lead to financial successes for your firm. Of course, this is another area where a great financial professional, like Skepsis, can help.
Third, if you’re looking at YNAB, use this link to get free month (referral link). After your first month, YNAB is only $84 per year. That’s seven dollars per month, which is about one latte. Would you spend $7 per month if that expenditure would put well over $7 per month in your pocket? I sure hope so! When you start using it and seeing how much YNAB can save you, not only in money but also in time and in the headache of decision making and trying to figure out if you can afford something, it’s a significant net gain.
Finally, don’t hesitate to reach out to professionals for help. At Skepsis, we do law firm bookkeeping and financial consulting, period. We don’t serve any other industries, because we know the legal industry inside and out. Our job is to not only keep your books, but also to support you in developing and implementing strategies that will make your firm more profitable. We invite you to schedule a free consultation to discover the hidden profits Skepsis could help uncover for your firm.