It may seem like obvious advice, but you’d be surprised to learn how few new entrepreneurs follow it: when planning a business, your budget is your key to success.
Budgets provide business owners with vital information and flexibility in three key ways:
- They help you make an accurate and detailed plan for managing your expenses
- They give you a way to perform intensive analyses of your expenditures and identify areas for efficiency improvements and cost savings
- They assist you in planning for unanticipated expenses and future financial needs
Many people who are starting businesses for the first time draw up only loose overviews of their anticipated expenses and fail to create budgets with the kind of detail they need. This is a rookie mistake you’ll want to avoid at all costs.
Develop Your Initial Budget
Budgets can be created and implemented in any department, at any level of the organization, at any time during the preparation or post-launch phase. They are a proven tool with proven value.
Think of your budget as a living, breathing entity, not as something that’s static, rigid and set in stone. It can change, and it will need to change as your business grows, faces challenges, and makes strategic shifts in mid-step.
To create an accurate budget that still offers you that flexibility, follow these professionally recommended principles:
- Make your expense estimates as accurate as you can, and include a contingency fund if things cost more than you initially anticipated
- Categorize everything — money that seems to just be “sitting around” often gets spent poorly
- Create accurate and detailed tracking methods to account for various income streams and sources, so you always know how much money is coming in, and which sources it’s coming from
- If you have to make educated guesses, underestimate your income and earnings, and overestimate your expenses
If you have the resources, hiring an outside professional to help you create a budget could well prove to be worth the investment. It’s far better to spend a bit of money getting expert guidance than it is to risk losing many times more because of poor or inefficient planning.
Analyze Your Budget for Better Financial Performance
After you’ve created your initial budget and your business is up and running, it will soon be time to sit down and perform an analysis. Generally, you should do this after the first few months you’ve been in business, once things have settled into a pattern and you have the information you need to make an accurate assessment based on predictable activity.
First, compare your estimated expenditures with your actual expenditures. Were your forecasts accurate? Did you overestimate or underestimate? Did you accurately plan for the types of expenses you would face, or were there surprises along the way? If so, be sure to incorporate those issues into your next budget.
Next, do the same with your revenues. The reason it’s so important to define dedicated revenue channels and sources is that it will give you strategic insights into how your business is performing. When are you making the most money? Which sources are providing the lion’s share of your revenues? Are certain categories improving better or worse than you expected? Answers to these questions will be embedded in the numbers, which will, in turn, illustrate opportunities to maximize the earning potential of your business.
If there’s a shortfall between your revenues and expenses, plan to bridge the gap by carrying over your losses to your next budget. Then, trim and tweak as necessary to “pay yourself back” for the red ink from your last budget. If the shortfall is a large one, this may take longer than you initially anticipated, but it’s important to follow through. The long-term financial health of your business is at stake.
While creating and maintaining budgets is a lot of work, it’s well worth the effort and can put you on the fast track to financial success. Entrepreneurs who carefully manage every penny tend to be far more successful than those who wing it and just hope everything works out.