Why Do I need a Budget?

Small business owners are busy.  They wear many different hats to keep their business going.  The CEO decisions are theirs to make, but marketing, customer service and yes, even taking out the trash often fall to that person, too.  Every task you choose to do will take time.  Once you use that time, you can’t get it back.  Many people think that money is the most precious commodity.  That is not true.  Time is the most precious commodity.  You can always make more money.  Time is limited.  You don’t get a do over on time.  Once you use the time, you never get it back.  It is very important to CHOOSE what you do with your time. 

To get everything done, you prioritize your tasks and choose the most important ones.  You probably sign every check - right after you get done writing them.  So you know exactly what is going on with your finances – or do you?  Will you have enough money in September (9 months into your year) to make a large capital purchase (Furniture, Equipment, Computers, Software, etc…)?  Can you afford to upgrade your marketing email list management service to one that has a higher monthly fee?  What about paying your taxes when they are due?  Penalties and interest often double what you owe when you don’t pay them on time.  That is not a very good use of your money.  When will you be able to afford to add another employee?  These are all questions that you can answer with a well thought out and prepared budget.

Benjamin Franklin is credited with the saying, ‘If you fail to plan, you are planning to fail.’  This is especially true when it comes to budgeting.  Merriam Webster’s dictionary defines budget as ‘a plan for the coordination of resources and expenditures’.  Without a plan, you can run your business by the seat of your pants, but it is highly likely that you will forget something critical, like paying taxes.  Invariably you will be in the middle of a critical business function when your bank account comes up empty.  This leaves you scrambling to resolve the cash shortage when you should be working on satisfying your customers and increasing sales.  A budget will not guarantee your bank account will never get low, but it will help you identify areas ahead of time so you can plan your expenditures for the year or add an extra sales generating activity to cover the projected shortfall in your cash.

Let’s look at a couple of examples.  Let’s say you need to upgrade a component in your computer systems to make your processes more efficient.  This is a great reason to upgrade, it helps you with your time.  Without a budget you decide that you are going to upgrade before your next major sales initiative or busy season.  Again, on the surface this looks like a good decision, you want to be more efficient, especially when you have a lot of things to do.  But, because you don’t have a budget, you didn’t anticipate upcoming expenses correctly and the computer purchase has now used funds that you needed to make your sales.  A well thought out budget would have showed the potential issue and you could have delayed making the purchase until the cash was really available.

You may be considering adding an operational expense like adding another employee or an email list management program.  It is much easier to make the decision when you know how that expense directly affects your projected profit for the year and your month by month cash flow.  Maybe it is an expense that needs to wait until mid year or next year.  Your budget projections will give you a good indication of whether you are going to be able to afford the additional expense or not.  You can make sure you account for all necessary expenses, like an additional computer for the employee and the additional payroll taxes that will be payable on their wages.

Hopefully you can begin to see the benefit of preparing a budget for your business.  If not, I have one last thing for you to consider.  There is a wide range of first year failure rates for new businesses, from 30% to 90% depending upon which report you read.  Even on the low side, the statistics indicate that nearly one in three new small businesses won’t make it.  While there are many factors that can cause a business to fail, insufficient planning or not planning at all is certainly a contributing factor.  Make sure you plan sufficiently by putting your budget in place. 

If you are not sure where to begin, start by reviewing last week’s blog post: It is Budget Time - How will you prepare your budget?  In addition, the annual FREE online Excel Budget Prep workshop is starting soon.  Sign up with just your email address for the next session by using the CLICK HERE link.