Hello and welcome back! Today’s topic – Budgeting. Sounds fun right? I know it’s the dreaded budget but it’s a must in order to set yourself up for success. If you missed my last post on personal development, be sure to check it out here.
Okay here we go!
Creating a Budget can be a daunting task, especially as a small business. You have to predict expenses in a very fluid, ever changing environment. It’s important to have a budget regardless of how small of a business you are – to prevent those storms from affecting your business, a budget is a must.
Entrepreneurs know their “what”.
Now it’s time to figure out the “how.”
Budgeting allows you to see historical trends on income streams and specific expenses and predict future profits. It reveals unnecessary costs, where to trim unproductive expenditures and where to increase spending based on income return. Simply put, budgeting helps tell you what to do today, based on how you did yesterday so you can be profitable tomorrow. It removes part of the stress common with being a small business owner regarding money: you know how much you need and for what.
Entrepreneurs are creative and brave people. They have incredible financial goals and chase after a passion. Sit with one and you will find yourself hearing goals, dreams, visions, and purpose. Ask about challenges and you’ll discover the most common obstacle to be time and money. This is true even for an established business experiencing growth. Budgeting is an essential tool used to explain and predict success.
Those who attempt to manage money without even the most basic budgeting tools find themselves unsure of the inner workings of their business.
They aren’t able to see snapshots of all the facades of their work. They aren’t able to make decisions based on performance and predications but on resources available on the here and now.
A budget is something that you have and something you do. Not only do you need to create one, you need to follow one. A budget is allocating money and budgeting is the process of receiving and spending money. A budget is based on three basic principles. It shows past performance, current balances and predicts future needs. This is a simplistic overview of a very detailed process. Large corporations have teams of employees who work in finance, each dedicating expertise to small pockets of money. It is no simple task and its importance should not be underestimated.
The first purpose of a budget shows the history of income and expenses:
How much you made and how much you spent
The most common areas in this part of the budget are gross income, though you want to know which streams produced the largest amount of income, and a breakdown of product and wages. Expenses can be further broken down into smaller categories. For example, marketing, mortgage or rent, interest, taxes, insurance, transportation costs and equipment. This allows you to see where your income came from and can be surprising at times! You might find internet sales are higher or lower than anticipated or how networking has impacted a significant amount of sales. You can see that production ended up costing more or less than expected. You may see money needs to be reallocated in different marketing avenues or upgrades to equipment to increase efficiency. Simply, this allows reallocation of funds and focus.
The second purpose of a budget tells you where to spend how much. It is your current obligations, such as payroll, contractors and those every day bills. This can be a stressful part of the process, as you have to balance cash on hand and any expected account receivables with your obligations. This is the step you actually make the changes to your budget as you’re implementing it. Need to back off marketing? Need to maintain equipment? Have an insurance premium due this month? Need to invest more into internet sales?
Following your budget, actually paying what you have decided to pay, is the biggest success of a day to day plan.
This takes the uncertainly out of money. You know what you have and what you need. Dave Ramsey, a financial guru, encourages us to tell our money where to go. It’s important to tell your money what to do instead of telling your money what you can do. It prevents late fees, penalties and shortages. That in itself is a huge cost to business!
Finally, the last step is projecting growth and income. This can be the most exciting step of budgeting! This is where you get to see your business earn some income. After looking at past performance, making adjustments to spending and earning, you now get to grow!
Proactively predicting income growth instead of reacting to immediate market conditions allows for those changes you’ve made.
It allows you to know what to save for and how much. It shows if borrowing is needed, at what pace and how much you can afford. This step really puts the reality into your dreams. You can do this!
Budgeting is a necessary evil. It takes time, discipline and purpose. Really, at the end of the day, it is one of the most impactful steps you can do to ensure the financial success of your business. Bankers, investors, and others will want to know how you pay for what you do.
You have to practice your budget to make it work. It’s only as good as the paper it’s written on it if it’s not followed. Remember, a budget is not a fixed plan.
Enjoy the changes in it as you grow!
If you’d like to get in touch with me to learn more about creating your budget for your business, Click Here!