What is a budget and what is it good for? In general a budget is a projection of following business year, which is used to quantify and summarize the cash in- and out-flows of the company.
In most cases entrepreneurs already have some feeling about how their coming year will be like. They accumulate this knowledge from personal experience, predicting challenges and chances, the news about economic up- and down-swings and the good old gut feeling.
By using a budget plan you can add flesh to this skeleton, as this system will help you to put numbers to your gut feelings, which will “quantify the data” in more academic terms, and convince other decision makers within the company of your point of view, as your argument is now based on solid facts.
However what do these facts consist of? What do you need this for? The answer is… everything! For the rest of the article, just click the continue link.
A proper budget entails each and every bit of information of the company that can be measured in terms of money. This is the reason why professional accountants get paid so much to create budget plans at the beginning of every year and compare their projections with reality at the end of the year.
However this is also the reason why a well thought out budget looks so much like a scary monster with a million arms, the “T-accounts”, for every single action in the company. But this leads right here to tip number 1:
1. Easy to Understand List
Do NOT be discouraged! It’s not as bad as it looks. In reality a budget is not one huge thing, but the sum of a million tiny and easily understandable things put together into one big list.
When learning how proper budgeting works you start with looking at one isolated department at a time. Like the cash budget example we looked at previously, you can identify the expected uses and sources of cash and properly plan with it. Using this example you can approach different departments such as utilities, labor costs and overhead costs using the same methodology.
In budget planning knowing the details is what gives you knowledge about the whole picture.
2. One At a Time
Take it ONE step at a time! Get to know the details of your current budgeting department before rushing to the next.
Focusing on one or two areas gives you understanding of the whole process and you stand a better chance of creating a budget that you will actually follow.
Now we suppose you have gone through the long and difficult journey of learning proper budget planning, the tedious methodology and hard to access form of presentation. A lot of sweat, headaches, and sleepless nights later you arrive at the question: What are you supposed to do with this skill now?
With what you have learned you can actually start implementing your knowledge into the budget planning process now. Since none of the numbers are fixed in the budget, everything is subject to change. Being able to predict this change beforehand avoids negative surprises, the source of all uneasiness for any entrepreneur.
3. Everything Into The Budget
Every bit of knowledge you accumulate has a place in the budget!
The data necessary for adjustments may come from any source. Personal experience being the easiest to understand here. We will take the following as an example:
Your customers have been complaining about the lousy tech support the company provided this past year. Because you had a look around at the source of the problem you have identified two main reasons for this mishap.
One, your support staff takes forever to look up the problems, as they always have to check reference books and solution guides to give advice. And two, the computers they are working with cannot handle modern day problems anymore.
As a solution you order seminars for your tech staff, +10% for the budget booked under “qualification and training”, and a new set of computers, another +15% for “capital expenditures or CAPEX”. As you can see here, every decision you make can be reflected in the budget you plan.
The list goes on and on:
Newspapers report expected inflation to be 2%: Raise the whole budget by 2% (“inflation-adjusted”)
Local newspapers expect flu season to be really bad: Adjust for work hours and higher medical bills
Competition has become tougher: Raise discount granted to customers, raise marketing budget
The application of entrepreneurial drive to budget planning can have major impact on the quality and dimension of your projections. It is true that it may seem dry and boring to know such things, but the inferences and consequences derived from this is far from being trivial.
4. Use Your Data!
After we have had a look at what proper budgeting can do for you, we will now have a look at what budget planning can do the ones around you.
Having data available to you always trumps having no data. Being able to base your opinion on a factually supported guideline is a major advantage in any conversation, discussion or argument.
Use your projections! Data gives you credibility.
As an entrepreneur you will often have to justify your actions to various parties in- and outside the company. Whether they are employees, partners, customers or your local bank, many people are interested in your future plans.
Being able to show them your projections and a proper budget plan on how to achieve this projection is huge in terms of transparency and credibility. There is an implicit understanding that putting in so much effort in planning already shows great concern for the success and efficiency of your company and just goes to show the importance of proper budgeting.
Build a Budget, Plan for Results
Don’t let the complexity of the topic scare you. Although it is a lot to digest, the individual parts of budget planning are easy to understand and use.
Focus on the small picture. Understanding the details is what gives you confidence to work the big picture.
Everything you know is important. A budget is still only a projection of the real world and adaptations to fit those conditions are always helpful. There is world full of usable information out there for you to discover and incorporate!
And last but not least, information is power in more than one way. It will help you to make the best possible decision given the circumstances, minimize the risk you are exposed to and make your arguments valid and hard to challenge in any discussion. Having a budget plan puts you ahead of competition, gives you more control over the outcome and shows great credibility to business partners.
This is the gain you are looking at when you talk about budget planning.