When you start a business or have only a small, steady stream of income, creating an annual budget may seem like a pointless exercise. After all, if your income and expenses are predictable, why fill in a spreadsheet?
Instead of looking at budget time as a tedious chore, consider it an opportunity to take a hard look at how you do things and what you could do differently or better.
Here are FIVE KEY questions to help you on your working budget journey.
1. Does your budgeting process start with the premise that your business is successful?
Many business owners make a budget using current revenue and expense figures, and then they cross their fingers. Instead, start with your desired result and work backwards, filling in (realistic) numbers. Make adjustments line by line and see how they impact the bottom line. Figure out which line items need to be higher or lower, and make a plan so they become a reality. Does this sound overly simplistic? It is: you need to make money or save money to net more money.
2. Does your budget live on your desk or in a drawer?
Too often I see business owners make a budget and then stick it in a folder, never to be seen again. An active, living budget gives you ongoing information and a basis for decisions. As soon as the previous month is balanced and closed, have your bookkeeper prepare paperwork showing how the business performed in comparison to the budget. You’ll see your actual numbers side by side with the budget figures. This, along with your cash flow, will help you make predictions about the ebbs and flows of your business.
3. Where are you building opportunity into your budget?
Looking at a detailed budget with room for expansion allows you to think about the future and where there are opportunities. If you have three spaces under revenue for future diversified streams, for example, you will work harder to come up with three new ways to make money. We humans have an irresistible need to fill in the blanks.
4. Are you sharing your budget with the right people?
You may be embarrassed to have people know how much or little you make. You may shy away from sharing your budget because it is “private.” However, your bookkeeper needs a copy of your budget. There have been times when my bookkeeper has caught an error because there was a significant discrepancy between the budget and a payable. Also, if you are working with a business advisor, banker or peer group, they can help you make better decisions if they can see your current and year-to-date “Budget versus Actual” documents.
5. If you were to sell your business, would your budget and financials be attractive to a prospective buyer?
We know why we love our business and our customers, but it’s hard to convey that to outsiders. If a buyer looked at your financials, is there enough there to justify the existence of the business? This is not an irrelevant point. Many business owners have had to sell their businesses unexpectedly due to health or circumstances. Make sure your business looks as good on paper as it does in your day to day experience.
I hope I have convinced you that an annual budget is a dynamic, worthwhile document to prepare and to consult. When deviations occur, and they will, you will have a guidepost for making deliberate and strategic decisions.