There’s an old saying that goes a little something like this: “A budget determines where your money goes so you don’t have to wonder where it went.” Whether it’s in your personal life, or in business, a budget provides the foundation and the framework for financial success, writes Jim Vass.
Many small business owners start out on the right track (because they need to provide a detailed budget when applying for finance initially), but then they lose impetus, and as time goes on, they fall into the trap of believing that their general business accounting will keep track of their finances adequately.
But to be honest, this kind of thinking is a bit like looking in the rear-view mirror while you’re driving a car. Because, as its name suggests, accounting ‘accounts’ for your money. Budgeting on the other hand details your planned income and spending. Budgeting looks ahead. It is essential for mapping and monitoring your progress.
With this in mind, it is not enough to create your budget at the start of the financial year and leave it in a drawer. Your budget needs to be a living, breathing, document. You should refer to it, and revise it, often. It can help you to:
It’s important to understand that budgeting is not the same as forecasting. Typically, you’ll set a budget for the financial year, perhaps with a focus on each quarter.
Forecasting, on the other hand, is usually done more frequently – often monthly – and predicts past as well as current financial trends in your business. Forecasting drills down to the details which is important for keeping on top of your cashflow.
If your cashflow comes under pressure, then your budget can help you work out ways to cut costs until you’re back on track.
In my experience, many entrepreneurs tend to find this kind of financial detail tedious. But it’s imperative to get into the habit of regular budgeting and forecasting if you want to take control of your business, because crossing your fingers and hoping for the best, is not a particularly wise strategy for success.
That said, it’s important to always play to your own strengths. So, if figures and finances are not some thing you’re good at, get professional help.
Virgin founder Richard Branson has publicly admitted that it was several years before he actually understood the difference between debit and credit. But he knew he couldn’t fudge his way around it forever, so he learned. He learned how to read a budget, and to understand a balance sheet. There is no shame in not knowing. But it’s important that you learn some financial basics if you’re running your own business.
The good news is that most reputable small business accounting software, like Xero, has in-built features which enable you to pull out a skeleton budget, a starting point, and this can make the whole job a bit less daunting. But once you’ve done a few budgets, then it should get easier year after year.
At ATB Partners we’re all accountants as well as financial planners so numbers are sort of second nature to us. But none of us are particularly efficient at other things like IT and web design, so we hire the services provided by other small business to do that. What’s more, a professional can bring a fresh perspective to your business, as well as an impartial viewpoint when decisions need to be made.
Many small businesses owners make the mistake of thinking they can’t afford to spend money on professional help with things they don’t have the skills or the time for.
But the truth is, you can’t afford not to, especially when it comes to money matters.
There are a million and one things that can go wrong financially with a young and growing business and while a budget cannot protect you from all of them, it can help you to predict your future to a large degree as well as mitigate a lot of risks, and provide information for you to formulate a contingency plan if something goes wrong.
Perhaps more importantly, if you find yourself suddenly in need of eleventh-hour funding to get you out of a tight corner, a well thought out, up-to-date budget and neat, clean financial records will help you to secure a loan quickly with relative ease.