To Budget or Not To Budget: That is the Question

A question came up today on one of my discussion groups—do most small businesses have a budget? I had to reply that most of my clients don't, but I think it’s a great idea!

There is a saying that “if you don’t know where you’re going, you’ll never get there”. If you haven’t spelled out your business’ financial goals, and how you are going to achieve them, how do you plan to have your business become a success? How will you even know if it HAS become a success?

Even for an accounting type like me, budgeting is about as much fun as a root canal. (Unless, of course, you’re Richard Branson--I’d like to have his budgeting woes for a change!) But researching costs and pricing strategies, getting those numbers down on paper and doing the math can be an eye-opening experience. It can head you off from disaster as well as highlight opportunities for improvement. Doing a monthly check to see how you’re doing compared to the budget can keep you on track to meet your financial goals and let you know if you need to make a course correction.  A budget can also be used for scenario planning—seeing what effect a change in your operations or your pricing will have on the bottom line

How do you get started on preparing a budget? If you’ve been in business for a while, you can use your actual results as a starting point. QuickBooks, for example, will let you create a budget based on your prior year’s results, and then you can modify it for anything that you know will be different. This is the easiest way to create a budget, but it has some drawbacks. You may have some inefficiencies that won’t be identified this way, they will just roll forward. The process doesn’t force you to really look at the underlying activity behind the line item amounts.

If you’re just starting your business, or if you want to take an in-depth look at your finances, you will probably create a budget from scratch. You will project your income, your cost of sales, and your expenses in detail to create your budget. This is more time-consuming but forces you to really take a look at how they money is coming in and going out.

Preparing a budget for your income statement is the most common form of budget. In addition, it’s a good idea to prepare a capital budget to plan for purchases of equipment, and a cash flow projection to tie it all together.

While very few people will consider budgeting to be the most fun part of running their business, it can be one of the most instrumental tools for achieving financial stability and success.

If you’re a small business owner, please leave your comments on what type of budget process you use to project your financial results.