Why budgeting feels intimidating — and why it doesn’t have to be
When you hear the word “budget,” does it send a shiver up your spine?
While budgeting is one of the most recommended tools for financial clarity, many business owners don’t make one, or even actively avoid it, preferring to “lead from the gut,” settling for whatever the year brings.
Budgeting as a tool may be under-utilized and under-appreciated by many – but that doesn’t have to include you.
Don’t fear the reaper (or the budget)
The first thing to know is that budgeting is here to help you – not hinder you. They’re not here to restrict your creativity, or suck up all your time, or stress you out. You don’t need to be a financial expert or even a mathematician; all you need are your business’s financial documents and the knowledge of how to apply them. But are budgets really that beneficial?
- Get financial clarity: Budgets help you understand where your money is going and identify where you may need to reprioritize your spending.
- Streamline future financial needs: Know what you’ve got in the bank so that you know where you can spend on hiring and investments into your business.
- Align with your strategic goals: Identifies where you may need to realign your spending to support your business’s mission, growth, and sustainability.
- Support business forecasting: Know where you’ve got wiggle room – and where you may need to supplement for a rainy day.
Start your engines (and your budget)
Alright – so you know why a budget is important, but how do you get started? It can seem overwhelming. But again, all you need are your financial documents and an order of operations:
Step 1: Review your chart of accounts.
- Are there several revenue streams that need to be tracked separately?
- What is the cost of goods separated into Labor, Materials, Equipment, Supplies, Fuel, etc?
- Which items in fixed expenses need to be moved to Cost of Goods?
Step 2: Make a realistic estimate of the desired or required profit.
- How much money does the business require?
- What would be a reasonable return on your investment? What do the stakeholders need or feel would be a reasonable return on their investment?
- Are you able to consistently and comfortably cover the cost of fixed expenses? I.e. rent, insurance, products, salaries, etc.
Step 3: Check your expenses.
- Have you checked all of your fixed costs? Are there any that could be reduced or are extraneous?
- What expenses align with and support your goals?
- Do you track your expenses to cover all relevant periods? I.e., yearly, monthly, etc.
Step 4: Determine your revenue.
- What does your data say? You can pull this from accounting software, bank deposits, invoices, etc. If it’s money coming in from customers, it’s revenue.
- Double-check against your bank accounts – does everything match up?
Step 5: Implement and review.
- How does your expected budget pan out against what actually happens?
- Are you able to cover all fixed expenses and reach your revenue goals?
- What may need adjustment to better align with your goals?
Reach for the stars (or at least make a plan to do so)!
Remember, without a budgeting plan, it’s pretty hard to get where you want to go. Setting up a budget can be daunting, but it’s not impossible, and it has so many benefits for helping your business become profitable and sustainable.
