Do You Want To Build A Budget?
Let’s have a serious talk about your use of the “B” word…and, yes, I mean budget.
This is a topic that comes up a lot when I first start talking with people about their finances. Usually it’s something along the lines of “I know I’m supposed to have a budget, but….”
It’s one of those pieces of financial management that’s frequently recommended but many of us aren’t super clear on how to set or manage a budget. But don’t worry, it’s one of those things that seems more complicated than it actually is.
I like to say that budgeting is a Google Map for your business.
Imagine you took a road trip without your smartphone. I don’t know about you, but for me, wandering aimlessly on country back roads without knowing how to get to my destination makes me a little crazy. I’d rather know exactly where I’m headed – and finding out there’s coffee shop just up ahead is a nice bonus! The budgeting process can work in the same way.
You know that saying, “If you don’t know where you’re going… any road will take you there?” If you don’t have a budget, you’re essentially driving around without a plan or a destination in mind.
With a budget, you have a road map for your year.
You know exactly where you’re starting from and you know where you want to go. The details of the budget describe how you plan to get there. For a lot of small business owners, budgeting is something that begins a few years in, if at all. It can seem like a waste of time, especially if you feel you’re constantly putting out fires as you’re working to build your business. The irony is that the budgeting process (like other planning tasks) can help you think strategically and move out of “managing by panic” mode.
So, of course, there are a couple of good reasons to get into the habit of making a yearly budget:
* A budget gives you direction. The process of budgeting forces you to take a holistic look at your business and consider what is likely to happen in the next year. How often do you sit down and plan beyond the next day or week?
I know if left to my own devices, I wouldn’t look much past tomorrow. Taking the time to really forecast your revenue and expenses puts you in a different mindset – a planning frame of mind. The exercise of budgeting allows you to think bigger picture and plan for growth.
* A budget gives you a baseline. How do you know when your business is successful? What’s your magic revenue figure? A well-built budget can help you identify these important numbers.
It may seem like a fruitless exercise to plan the entire next year, knowing that you’re unlikely to match the plan. This lack of cohesion can be uncomfortable for any analytical minds out there. If this is you, don’t panic.
The beauty of a budget is that it gives you a place to start from. You have your expected income and expense numbers to work from throughout the year. It can be amazingly uplifting to realize that you need to reset your budget in June because your income is 40% above your estimates.
And, it’s okay that your actual numbers don’t exactly match your budgeted numbers. It’s highly unlikely they will ever match perfectly. The important thing is to do the work of building yourself a budget so you have something to compare against. You’ll be able to analyze your progress much more coherently.
So how exactly do you build a budget?
Nothing could be simpler. You can use historical data from your income and expenses and make realistic projections for next year. List out your income and expenses for the year and divide by 12. That’s your monthly budget.
Of course, there are nuances to the process, but that’s basically it. I had a client, Marin, who was really freaked out about budgeting. It seemed like a magical, incomprehensible process until we walked through it together. Once we broke down the steps, she started to see how she could set and review her numbers. Now she looks at her budget all the time and feels great knowing she’s put a plan in place.
Do you use a budget for your biz (or personal life)? How does it help you? Drop a comment and let me know!
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