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by Serenity Gibbons
December 05, 2017
by Serenity Gibbons
December 05, 2017
Budgeting isn’t a sexy topic, but sticking to your small business budget is pretty important subject for small businesses. Especially when most are forced to work within the confines of some pretty tight numbers.
Here’s Why Your Business Need a Budget
Like it or not, setting a budget is one of the most important things you’ll ever do as a business owner. A budget is a guiding force that allows you to make sense of what’s going on around you. But what are the specific reasons for needing a budget?
Here are a few:
When a pitcher throws a baseball, he isn’t just winding up and hoping it finds its way into the strike zone. He’s looking at homeplate and throwing based on a combination of factors, including the placement of the catcher’s mitt. Just as a catcher’s mitt creates a target for a pitcher to throw at, a budget gives your business something to aim for.
When you have a budget in place, everything your organization does suddenly has calculated meaning attached to it. If you ever find yourself in a position where you don’t know how to proceed or what to spend money on, your budget acts as a guiding force and clearly outlines how your actions should be prioritized.
Not only does a budget establish priorities for those in executive leadership positions, but it also communicates to everyone in the organization what your company values. In other words, if your budget is heavily focused on sales, then it’s clear to your employees that the number one goal is driving revenue. If the budget is heavily focused on employee training, then this sends the message that the company is focused on investing in talent.
It’s often difficult for everyone in a large organization to get on the same page. A budget makes this process easier by clearly outlining what the business is focusing on and what role each department or individual plays.
While budgets are great for getting everyone focused and moving towards a specific goal, they’re also excellent measuring sticks. At the end of a quarter or fiscal year, you can look back and get a feel for how things went over that period of time.
The importance of a budget can’t be overstated. While there are plenty of other responsibilities you have as a business owner, almost every single one of them is related to the budget in some form or fashion. Mess this aspect up and you’ll put yourself in a compromising position.
While setting a budget does take some skill and attention to detail, anyone can do it. All you need to do is track your revenue, account for expenses, and then spread out the money according to where you want it to go. But while the budget creation process happens in a sterile conference room or office, the execution of that budget occurs in a dynamic environment with hundreds of uncontrollable factors. This makes the issue of sticking with a budget challenging, to say the least.
Sticking with a budget is difficult, yet necessary. And while every organization has its own challenges that it must overcome, here are a few practical tips for staying the course:
It’s impossible to stick with a budget if you don’t have realistic numbers. It doesn’t matter how organized and detailed a budget is, you can’t possibly accomplish anything if the numbers aren’t practical.
Setting realistic numbers means carefully evaluating your company’s financials over the last few months. Then making conservative projections based on the averages and trends you’ve identified.
While a budget should be balanced down to the penny (or dollar), there’s something to be said for leaving a little room for flexibility. Too much rigidity is impractical and will ultimately prevent you from accomplishing objectives and fulfilling needs as they arise throughout the quarter or year.
How can you balance a budget and leave room for flexibility? One option is to include different funds and portions of the budget that are reserved for future decision making. In other words, don’t assign every penny of the marketing budget to specific needs. Leaving a percentage unallocated allows you to confront opportunities as they arise. This makes the “control freaks” in the room a little nervous, but it’s totally necessary.
A budget looks good on paper, but it’s up to people to see it through. If you don’t have the right people making good decisions, then you’ll find it impossible to stay on track for any sustainable period of time.
“Sticking to a budget can be challenging at first, but holding all individuals accountable is vital,” OnQFinancial explains. “Periodically go over the budget with everyone involved so that everyone is on the same page. Working together as a team is the best way to approach sticking to the budget.”
Accountability starts from the top. Not only should you be holding your employees and departments accountable, but they should be keeping you accountable. It takes a special type of organization where subordinates feel like it’s okay to hold their superiors accountable, but this is the type of company you want to build. It won’t always be easy or comfortable, but the long-term outlook is much stronger.
A budget isn’t something you can create in your office and then distribute to your employees. While this is technically possible, it isn’t practical. A budget created in isolation will rarely – if ever – accurately reflect the needs of the company as a whole.
Successful budgets involve multiple people throughout the organization. Ideally, every department needs to be represented by someone who is looking out for its needs. Someone who understands what it takes to make things run efficiently.
If budgeting is considered boring, most business owners don’t even want to think about accounting. Crunching numbers seems like a miserable task, but it’s entirely necessary (especially if you want to stick to your budget.)
Because of the unappealing nature of accounting, a lot of businesses neglect it until they absolutely must deal with it. If you know what’s good for you, you’ll avoid this pitfall and take a proactive, conscientious approach.
As entrepreneur Vikas Agrawal explains, “Even the tiniest expenses should be tracked down and analyzed by the end of the month to trigger if we did something wrong, to see where we can improve, and to acknowledge if there is room in our budget to make some extra investment our business might be requiring.”
One of the biggest mistakes small businesses make is setting a budget and then leaving it alone until the end of the quarter or fiscal year. With so many variable factors involved, this isn’t something you can do if you genuinely want to stay on track.
“If your budget is going to work for you, plan on revisiting it on a monthly basis with your management team and update it based on your business performance and expenses for the prior month,” small business owner Caron Beesley advises.
When reviewing your budget, ask as many questions as possible. The more inquisitive you are, the more likely it is you’ll identify opportunities and eliminate mistakes. As Beesley suggests, “Take a look at your sales forecast – how’s your pipeline looking? Are there any indicators that you need to make changes to your budget to cover additional inventory or staffing needs? Look at your expenses – are they as projected, or do you need to cut back in certain areas to ensure you stay on track?”
A budget is like any other goal you have in your personal or professional life. Perhaps one of the easiest illustrations is to think about a weight loss goal that you might set at the beginning of the year. A budget is like a weight loss plan.
But just because you have a weight loss plan, doesn’t mean you’re actually going to lose the weight. In order to realize the end goal, you have to execute the plan and stay on track.
As your company’s leader, you have to keep the business on pace and pay careful attention to the budget you’ve set. When you notice things going astray – as they often will – right the ship and bring everything back together. Sticking to a small business budget can be challenging, but it’s far from impossible.