The Mystifying Concept Of Budgets

People universally despise budgets. I believe it starts in childhood and is fully developed in adulthood. Most refuse to utilize them as management tools, in their lives or in business. That’s a fact.

As a kid, when you got your allowance you could decide how to spend it. Aha! The beginning of understanding the budgeting concept. Frequently, though, kids spend impulsively until the money’s gone then wait for the next disbursement, similar to the way many run their businesses. Some kids would budget for lunch money, bus fare, and of course, fun “stuff”, but this would not last long or be consistent, as all too frequently the cash would go to whatever was most important at the moment.

As they grow older, people tend do what I call partial budgeting, i.e., saving specific amounts of cash for specific items like rent, car insurance, car payments, etc. It works for the specific purpose you are “budgeting” for but does not satisfy the overall planning function budgets were meant to support.

In business, people “budget” for payroll, in actuality hoarding all the cash that comes in until payroll is covered and then applying any additional available cash to whatever is next most important. This is a priority list budget. It’s also not really a true budget, as there is no real planning involved or choices considered. The entire picture is not budgeted, just a few high priorities are. Even business owners who have adequate cash tend to budget on the fly, allocating cash to whatever is owed or required or seems most pressing at the moment. If there is enough cash to cover it all, there is no real need to budget, right? Wrong!

So, why budget? Here are three very good reasons for budgets:

1. Budgets, done properly, protect your bottom line by preventing over-spending and depleted profits.

2. Budgets make certain there is enough cash at the right moment to do everything required in your business.

3. Budgets reduces stress, increase stability, and allow for orderly business growth and development.

If one creates budgets for all repetitive or known single payments, and creates line items such as an advertising budget, employee payroll budgets, inventory budget, etc., then one determine the use of cash, the amount of retained earnings and everything money is spent on will be identified and rationalized, fitting into the overall operating equation. It’s the ultimate control, assuring you are on course and heading toward achievement of your goals and objectives.

Two ways to determine budgets:

1. Look at last year’s spending in a particular area and add a few dollars to the budget for this year, repeating the same expenditure and program. Many do this.

2. Start each line item with a zero, which is known as “zero start” budgeting. Do not look at last year’s numbers and try to redetermine what may actually be needed or desired for any particular line item. In other words, rationalize the budget for each line from zero to whatever is required based on the next year’s business plan. This is a much better process.

Budgeting protects your year-end profits and assures every dollar spent is spent well. It may not be sexy, but budgeting is a very important business strategy. It forces planning, strategy and review. It requires a business plan to be determined and executed by the book as the budget reflects the plan and controls the direction the business will go. It is the ultimate control and the best way to assure profits at the end of the year. Please reconsider your finance and operating process and add budgets to the plan–it will serve you well.