In all my years advising businesses, I have seen many that just did not have budgets. These operations ranged from relatively large businesses with $10 million in sales to very small businesses and startups.
Every time I ran across one of these businesses, I mentioned to the CEO how vital a budget is, and without exception, every one of them said they realized a budget was important but had simply never followed through to develop one. This is especially troubling since QuickBooks has a feature that allows you to set up a budget relatively easily.
Budgeting is just so basic. It gives the entrepreneur the control and accountability required to manage a business, so it is hard to fathom why some do not make it a priority. Some entrepreneurs have given me the lame excuse that they just do not see the value in budgets.
I have given this some thought, and I think the reason is twofold. First, some of the leaders of these organizations do not understand financial statements. If you do not understand financial statements, a budget is not going to be of much value because you cannot make sense of the numbers. Second, businesses that are tight on cash flow are not going to value a budget, as their only concern is whether they have enough to meet the next payroll.
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Budgets enable you to manage your organization. In some cases, it can be hard to estimate revenues and costs, but just going through the budgeting process is so valuable as it spotlights the factors that tend to cause revenues and costs to change over time.
One entrepreneur I worked with was convinced he could never use budgets because his revenues were too volatile. However, I was able to help him understand that what determined his future sales was the number of calls his salesperson made to potential customers. He realized from this exercise that he needed to manage his salesperson differently. He was also able to see how easy the budgeting process became once he understood the factors that determined future sales.
Even if you cannot get a handle on what determines your sales, you can estimate what they will likely be and just refine that number over time.
Budgeting is not rocket science, but a tried and true method of managing your business better and more profitably. I have seen firms become more profitable simply by introducing a new budget.
Now go out and develop a budget for your organization. At first blush, budgeting seems hard to do, but once you start the process, you will see how easy it is to manage this new system. I assure you, you will be so pleased with the results.
You can do this!
Jerry Osteryoung, a business consultant and Jim Moran professor of entrepreneurship (emeritus) and professor of finance (emeritus) at Florida State University, can be reached by e-mail at jerry.osteryoung @gmail.com.