A common thread among successful business ventures is the annual creation of a budget for the upcoming year. Entrepreneurs who hold budgeting in a place of distain typically misunderstand how to simplify the process.
Budgets should not be time-wasting exercises that incur quick obsolescence during the fast pace of business. Creating a budget entails little time actually placing figures on a page when the focus is clear thinking that forms a path to a financial model. A properly devised budget promotes valuable oversight to which every business owner should subscribe wholeheartedly. When conducted wisely, the benefits of budgeting far outweigh the cost of time devoted to its development.
Avoid Excess
Budgets should be as simple as the business types they embody. A one-person operation, for instance, is inclined to have a basic budget that’s easily malleable for rapidly changing conditions. A shop or store with several employees generally requires a more refined budget. But exquisite detail is not the aim. Rather, the valuable time devoted to budgeting should merely be commensurate with the instructive administration the plan is designed to deliver.
A business budget is more than numbers on a spreadsheet. Instead, budgeting is a thought-provoking process. Willing yourself into making a budget shines a torch into the tunnel of expectations for the future. It forces you to predict what’s likely to happen as a result of your intended actions. With a budget, you also quantify the predicted impact of industry trends, demographic changes, and general economic conditions.
Flexibility
The simpler your budget, the easier it will be to compare with actual results. You can always alter the budget for changing circumstances. Some business costs are fixed monthly amounts. But many costs depend on the size of revenue. Budget planning begins with differentiating fixed and variable costs. When expected revenue changes in the future to new projections as actual results unfold, revised upcoming variable expenses are easily tallied as percentages of sales. Costs directly related to sales volume are either moved forward or scaled back.
With both fixed and variable expenses considered, your other concern is major non-recurring expenditures. Your budget yields confidence that spending plans are reasonable based on cash flow. A red carpet for major expenditures is provided because the budget shows available liquidity. As the year unfolds, however, with better or worse than expected results, the level of importance you assigned to costs of non-recurring nature causes these expenditures to shift sooner or farther into the future.
Think Before Quantifying
Adjustments to your budget assumptions depend on the thinking you did before quantifying anything. Budgets ultimately save money because they compel you to prioritize. Although expenses are a certainty in business, cash is a limited resource. Budgeting identifies how much money to allocate for each category of expenditure and when you can afford non-recurring cash outlays – such as for training, new equipment, staff additions, or a special marketing campaign.
Because budgeting entails as much thinking as calculating, beginning the mental endeavor well before the year-end recording of numbers is a wise move for all business owners.
The Finance Writer 