A training client of mine sent me this great question that I want to share with you, along with my response.

“I have this, perhaps inaccurate, idea that at the beginning of the year, business folks sit down and create a budget for the year, deciding how much they will spend on XYZ and maybe QRS too. 

And then they review this every once in a while.  Are we overspending on X?  We’ve really underspent on Q — should we be spending more?  Should we take those funds and allot them elsewhere?  Oops, we are really in the hole, maybe it’s time to raise prices? 

Is this how people do it?  What do you think of this system?  What do you advise?  I am trying to spend more time on the financial end of my business — develop a relationship with it.  My books are up-to-date, but I do feel at a bit of a loss. 

For the rest of the year, I have a sense of what the monthly recurring things are, as well as other expenses that are coming up (such as booth fees).  Does that help?”

Ahhhh, budgeting!  It’s one of those aspects of money management that everyone tends to dread. And developing a relationship with your business’s finances — what a great goal! I love your question.

What does budgeting mean to you?  For some business owners it’s figuring out personal budget matters, like “How much does it cost to feed this family of four anyway?” and “Can we afford to buy the most lavish gifts on our children’s wish lists this year?”

And for others, it’s tackling the more profound–and at times much more frightening–questions that deal directly with their business, such as “Is my business making enough to support me?” and “Did I spend too much on business classes and advertising this month?” and “Are sales up or down over last month?”

 
To tell you all the absolute truth – most small business owners do NOT budget.  I’ve been doing this type of work for a long time and I’ve worked with hundreds of small business owners.  Most small business owners use what I call “bank balance budgeting.”
Want to take a stab at guessing what that approach looks like?

I’m sure you can picture it because we’ve all done it.  Some of us do it all the time, others only when money gets tighter than usual.  But it is the reality for most small business owners that they watch how much money is in the bank and use that as their go to method for figuring out how much they have available to spend or invest in purchases for their business.

This method may work well enough for some people and even for some businesses; if income and expenses tend to be fairly stable without a lot of fluctuation.  And it’s always a good idea to keep an eye on what’s in the bank, just for practical reasons as well.

But, the best approach to small business budgeting is going to be one that really works FOR you, the business owner.  It is a really great idea to sit down on a regular, perhaps quarterly, basis and sketch out what you anticipate for income and expenses over the coming months. 

(My dear client who posed this question has pretty much described how to do so!  Thank you for that!)

However, it’s best to sketch out the future months based on a detailed review of the months that have already happened.  Past performance is usually the very best indicator of future performance, both in people, such as employees or colleagues, and also in finances, such as sales and spending trends.

This budgeting approach allows you to spot any drops in income or increases in expenses as they are happening, rather than well after the fact when you notice that you just don’t have nearly as much in the bank as you did before.

For our clients, we do something that I recommend for all small business owners – we’ve set up a method for the business owner to compare what they’ve made and spent this month in comparison to the same month last year.  We also provide reports that show this year-to-date in comparison to last year-to-date.

And the reports we provide allow the business owner to look into the future while clearly understanding what’s happened in the past.  This is the key – knowing where your business is at today and how it got here, where you want your business to be in the future, and having a clear financial road map that will allow you to be in the driver’s seat and get it there!

If your current bookkeeping system isn’t providing you with the tools you need to budget for your business, let me know and I’ll help you create a system that will work as hard for you as you do for your business!

 

 

By Jessica Reagan Salzman