The aim of a business budget is deliverance of value, not creation of an oppression holding you hostage. Successful entrepreneurs discard presuppositions and prejudices against budgeting and derive useful guidance embedded in their budgets. An ideal time for the timid to embrace this pattern arises a few months into a new year, when planning has a sharper focus.
With the books closed on last year – as final adjustments are recorded and errors rectified – take a look at the results to assure your budget for the current year is based on reality rather than hope. Establishing a useful business budget begins with uncovering the right questions before deciding on answers. Ask yourself how some of the prior year expenses could have been avoided and which ones require modification to reach your goals. During this answer-deriving process, remembering some basic truths permits you to conquer the specter of overwhelming apathy.
Why Budget
Having goals is different than establishing a budget. Without written financial guidance, great ideas remain unfulfilled possibilities in the minds of business operators. A budget gives you a formal plan for reaching your goals. You follow it to attain intended targets. Operating without a budget leaves you in the dark about your spending path. No matter how much success you’ve enjoyed in the past, there’s a fine difference between confidence and recklessness.
Many business owners who understand common sense financial rules fail to create budgets for their commercial enterprises. Conversely, when buying a house, they know the necessity of determining how much they can afford. And they consider their ability to pay for the home’s taxes, insurance, and utilities. When buying a new automobile, they carefully consider price and maintenance costs. Deciding how to economically and efficiently spend business money demands the same diligent evaluation.
How to Budget
Following a budget by comparing predicted outcome to actual results permits you to see why you’re doing better or worse than planned and to make adjustments. Unlike flying saucers landing in the desert, cash flow problems are real. Monitoring cash flow is the only way to efficiently manage it and survive disruptions. Comparing your budget to actual numbers reveals negative trends you can reverse and positive trends you can exploit. If you under-budgeted certain expense categories and revenue isn’t on target, a sound reaction is to reduce spending in other areas. If revenue is rising faster than predicted, find what you’re spending differently than planned and budget for continued growth.
A good budget is accurate and realistic. That’s why making changes after the year starts is so important. The final numbers from last year form a baseline for consistency with this year’s budget. Also remember to fine-tune your budget for seasonality. Examine your monthly financial data of the prior years for patterns. Businesses in most industries should have current year budgets with fluctuations in monthly results. Seasonal factors in budgets are crucial for rendering guidance about appropriate spending in distinctive months. With practice over time, your budget is certain to become an effective utility.
The Finance Writer 