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Budgeting Essentials Blog

Helping you master the practical essentials of Budgeting, Cash Flow, Accounting and Debt Relief.
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What is a Budget and Why Do I Need One?

Last week I talked about Finalize Decisively.   If you missed that post, you can review it HERE.  This week’s topic is: What is a Budget and Why Do I Need One?  Before you can understand how a budget can help you, you have to know what it is.  This week I discuss what a budget is how it can benefit you.

 

Sometimes we get ahead of ourselves and dive into something before we understand what it is.  We take the word of someone we trust and just begin.  Usually by the time we finish learning, we figure out why we should be doing it.  But there is a better way to do it.  When we understand what we are getting in to before we begin, we can be looking at what we are doing with a different mindset.  You don’t have to figure out why you are doing something at the same time you are trying to figure out how to do it.

So what is a budget?  Merriam Webster’s Dictionary gives us a great definition for a budget.  A budget is “A plan for the coordination of resources and expenditures.” 

Notice first that it is a “plan”.  Plans help you know where you are going.  When you don’t plan, it is like going on a trip to someplace that you have never been before.  You don’t know how to get there and you don’t have a map, a GPS or anyone with you who knows how to get there.  So you just start driving randomly and turning wherever you want.  You would be extremely fortunate to get to your destination with this method.  The same thing applies to your business.  Without a budget, you do your work, get paid, pay the bills and turn wherever the current business activity leads you.  Then you wonder why you aren’t making as much money as you were hoping you would.  You aren’t reaching your potential.  You need to have a plan for where your business is going or it probably won’t reach its potential.

The second thing to notice is that is a budget is a “coordination of resources and expenditures”.  More simply said, you are matching your money coming in (resources) to what you are spending and the profit you are paying yourself (expenditures).  Doing this matching allows you to decide in advance how you want to spend the money that is coming in.  It gives you advance warning on times when your estimated money coming in is going to be low compared to the estimated money you will be spending.  It lets you know in advance what effect making a particular purchase is going to have on your business.  You don’t have to remember what spending is coming up, you can look at your well prepared budget and see what you projected.  It will help you remember those infrequent payments that can sneak up on you instead of trying to keep your business and your finances all in your head.

Some people only consider using a budget when their money is tight.  They get to the place where they know that if they are not deliberate and structured that they get into trouble.  Yes, budgets are good for those times when cash flow is tight.  But think about how that budget could help you when times are good.  Sometimes a number of small items that you purchase combine to eat away your profit for the month.  Suppose you have a business that requires you to have certain tools.  The tools aren’t particularly expensive, about $20 each.  Instead of being organized with your tools, you pick one up if you can’t find it right away.  If you average one purchase a week, over the course of 5 weeks, you have spent $100.  In a year, that number will be around $1040.  That is over a thousand dollars that you could have used for something else or kept to increase your profit.  You can also avoid having a bunch of duplicate tools that you don’t need.  Items like this are harder to recognize when you don’t prepare a budget, because part of preparing that budget is analyzing what you are doing.

When you prepare a well thought out budget for your business when times are good, you can focus more money in the areas that are important to you.  It will be easier for you to spot areas where your spending has gotten off track, like in the tool example I shared with you.  You can plan for regular expenditures, as well as spot potential cash shortages – with time to do something about them. 

Preparing a budget doesn’t replace running your business, it is a tool that helps you run it.  You can put more money into your pocket, invest it in new equipment or use it however you choose.  The key is that having a budget will give you more control over your finances.  You will be able to anticipate potential cash flow issues and make better spending choices that will result in less crisis management of your cash.  You will be able to spend more time focusing on your business so you can put more of your hard earned cash in your pocket.

If you know someone this post will help, please share it with them!  Then scroll down to the comments section and leave me a comment on this post.  If you aren’t already a subscriber, sign up for notification emails and other promotions!  Have a great week!

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© 2018 Dan Heiland 2018 Kat Heil, LLC

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