I have read posts by really smart people that are pretty negative on budgets. Why? Usually for two reasons: 1) Businesses spend too much time developing their budgets and analyzing variances between actual results and the budget, time that would be better spent on actions that will help the business going forward, and 2) Budgets are quickly obsolete because of the fast pace of business.
Let’s take the first one, that you are better off spending your precious time and other resources on other things than the budget. I agree! I have seen (and been party to) businesses who spend way too much time developing an exquisitely detailed budget and then analyzing down to the penny the variances between the budget and actual results. You need to spend some time on your budget, but it is possible to spend too much time studying history and not paying enough attention to what’s happening now.
The second argument – why bother if you know the budget you spent hours and hours on is going to be wrong anyway – is also true. Sometimes the budget you developed months ago is so wrong that it’s not worth comparing to your actual results.
So why do a budget at all?
1. Because a budget is more than just a bunch of numbers.
It’s a thought process that will prompt you to come up with predictions of what could happen in the future and how that will affect your business. These could be big things you can’t really control, like economic trends, population demographic changes, the price of oil, etc. or more direct things, controllable or not, like construction on the street your business is on, plans to expand into new territory, difficulties in finding suitable candidates for a key position, changes in suppliers, etc.
2. You can save time and money.
For example, I love going to training, but training is expensive. If I’m not careful, I could spend way more than I should on it. Even worse, I can spend too much time evaluating what training I should go to. With a budget I decide ahead of time how much I’m going to spend on training, which types of training I’m going to buy and what training I will defer to future years. This way I don’t waste a lot of time looking at emails and considering how fun it would be to learn about consolidation of VIEs and limited partnerships in San Diego. (I’m saving that for next year.)
3. You can make decisions with confidence.
You already know that if a major expenditure is budgeted that you should have adequate cash flow to pay for it. And since your budget was done ahead of time and showed that you could run into a liquidity problem, you have already opened a line of credit that can be used as needed.
4. You will understand your business better.
It is amazing how much more you will know about how the finances of your business really work when you spend some time comparing your assumptions in the budget to what happens in the real world. Your next budget will be easier to put together and probably more accurate as well.
5. You can change your budget, or change the length and frequency of budgeting.
To address the problem of your budget being so far removed from what is happening in your business today, you can start over with a new budget. And there is no rule that your budget has to last 12 months. You can also set up a flexible budget, which means that for your costs that are driven by sales volume, your expense budgets for those costs adjust accordingly. You can do the same thing with prices of key commodities by having your budget adjust automatically if prices for key commodities go up or down.
Budget season is coming up very soon. I hope you can really benefit from developing a budget for next year. Stay tuned for my next post: Dos and Don’ts of Budgeting