The Point of Budgeting In Small Business

Too many small businesses operate without budgets. And many small businesses that do have budgets aren’t getting as much out of them as they could. We’ve seen it time and again.

It isn’t because the mechanics are difficult to manage. Everyone knows the basics of how budgets work: you track money coming in, you track money going out, and you do your best to plan for the future. In fact, the very simplicity of that formula is what leads some small-business owners to consider budgets not worth the trouble.

Therefore, what we’ll discuss here isn’t what budgeting entails, because if you don’t already know that, you can find it out with ease. We’re more interested in why you should budget in the first place. Our suggestion, to put it plainly, is that budgeting is a way to amplify the very creativity and adaptability that allow small businesses to thrive.

Budgets’ Reputation

You don’t become an entrepreneur because you have a burning love of spreadsheets. At least, not usually. Being an entrepreneur isn’t supposed to be about budgeting. It isn’t supposed to be about paging through endless columns of variable costs or putting caps on spending. It’s supposed to be about having the freedom to blend innovation and risk-taking with passion and expertise. It’s supposed to be about removing barriers, not building them.

That being the case, small-business owners often see budgets as antithetical to the very spirit of entrepreneurship. According to this perspective, budgets impose stifling limitations. They’re artifacts of mega-corporate culture devised by clammy-handed people in windowless rooms with poor lighting. They may be necessary evils for sprawling, inhuman conglomerates, but when it comes to organizations that rely on individual personalities and individual decision-making, budgets are more burdensome than helpful.

You might say the constraints imposed by budgeting make small businesses less nimble. Since nimbleness is one of their main advantages over larger rivals, budgets actually decrease small businesses’ ability to compete.

Or so the story goes.

Some of it is accurate. For instance, it’s true that passion and innovation go hand in hand with entrepreneurship. It’s true that small businesses should strive to leverage their size into a competitive advantage. And it’s true that budgeting for small businesses is much different from budgeting for colossal corporations.

What’s not true is that budgets impose constraints. Budgets don’t actually impose anything. They merely describe constraints that are already present. Perhaps more importantly, they describe a business’s ability to cope with and even manipulate constraints placed on it by forces internal and external.

Constraints and Entrepreneurial Creativity

If you’re an entrepreneur, you’re aware that your business doesn’t operate in a vacuum. It’s part of a staggeringly complex system. For instance, you have your relatively immediate concerns, such as your employees and your local government. You also have your relatively big-picture concerns, such as national debt and foreign trade policy. No matter what, when you start a small business you’re going to be hemmed in by laws, regulations, and unavoidable economic realities, all of which will have a major impact on how you operate.

In other words, no small business starts out in a position of unfettered freedom. The very conditions that allow small businesses to exist also impose a variety of constraints. Working capital, interest rates, the minimum wage, the minimum competitive salary for professional employees-there are countless factors that limit what you can do and how much money it takes to do it.

You can acknowledge the reality of these factors, but if you don’t have a budget, then you might not know the exact ways they’re affecting you. What particular constraints does a business in your industry have to deal with? Are there some that have a disproportionate impact on you because of the way your business functions? Can you make changes to reduce their impact? Are there constraints that you handle in an especially productive way? Can you turn this productivity into an advantage over your competitors? Do you approach some constraints the way everyone else does, even though you could be doing a better job with them?

These are the sort of questions a budget helps you answer. It doesn’t create limitations that weren’t there before. Rather, it gives you a way to assess the pre-existing limitations that every small business in your industry has to deal with. The more thorough your assessment of those limitations, the greater your ability to work within them, work around them, or in some cases, make them work for you.

Making limitations work for you is where entrepreneurial creativity comes into play. If you have enough details on your business’s limitations, then you’ll be better able to turn those limitations into innovations. A budget will help you marshal your creative energies and find the opportunities for profit embedded in the market’s constraints. It tells you exactly what assets you have to work with, and helps you map out how those assets can be put to the most productive use given the rules of the industry.

After all, most of the market-based constraints you experience will be shared by your competitors, who also have limited amounts of money and freedom. Which of you comes out on top won’t be determined by who has the fewest constraints, but by who does the best job of manipulating common constraints to find the possibilities they hide.

Speed, Spontaneity, and Profit

Small businesses, precisely because they’re small, tend to be better than their larger competitors at taking quick, decisive action. It’s one of their vital advantages. By the same token, it’s one of the challenges that all entrepreneurs are bound to face. You’ll be forced to react on a moment’s notice to emerging opportunities or perils in the market-that’s a given.

What’s less certain is the profitability of your reactions. Obviously, acting or adapting fast doesn’t do much good if it yields a loss.

So what information will you use to make your quick decisions? Do you have a detailed, practical breakdown of your business’s strengths and weaknesses? Do you know exactly how many resources you can afford to redeploy at a moment’s notice? Do you know how efficiently different aspects of your business tend to use the resources you devote to them? Are certain aspects of your business already strained? Are certain aspects flush with the potential for expansion?

A budget gives you a diagnostic readout of your organization. It tells you how much stress the business can handle and which areas can handle it. Hence, it helps you decide whether acting conservatively or aggressively in the short term will enhance your performance over the long term. Without a budget, you’ll be relying too much on guesswork, and many of your quick decisions may be needlessly risky.

Supply-chain Relationships

A budget not only helps you assess yourself, but also helps you assess your relationships with other entities, like vendors and subcontractors. This will be especially important when the market is in flux.

As you know, successful entrepreneurship entails evaluating the vast array of forces that constitutes the market and determining where-for someone in your industry, someone with your passion and expertise-the opportunities and roadblocks lie. But no one can predict with any certainty how the market will behave tomorrow. There will be surprises. Sudden chances and sudden setbacks.

We’ve already noted that the way you respond to these inevitable surprises will play a critical role in the profitability-or survival-of your business, and that your ability to make the right call at the right time will be drastically greater if you have a budget in place. This is not only because a budget tells you about your own resources, but also because a budget helps you deal with other organizations that affect you.

Let’s say you experience a sharp increase in demand for your product. It’s good news, but it brings up questions: Do you have enough working capital to provide your product to a large number of new customers/clients? What are the current resources of each division of your business? How many more resources does each division need if it’s going to ramp up its activities? How efficiently does each division tend to use its resources?

These are all internal questions that may well lead to others, such as: What do your vendor accounts look like? How much new inventory can you afford to purchase? What type of sales will you need if you’re going to pay off the new purchases on time? Can you afford to hire subcontractors to help with the push?

And, of equal or greater importance: What’s your plan for a downturn in demand? Will you find yourself in a precarious position with your vendors? Will you be able to keep promises to new customers? Will you be able to pay your subcontractors for the hours they’ve put in?

Indeed, budgeting can provide invaluable support for all your relationships. As noted on Inc.com, “your suppliers are in all likelihood mapping out their expectations for the year and you can help them do so by providing your outlook. As a best practice, you should share your budget and the variety of scenarios you might face to see whether they can handle each level of demand” (Field 2010).

Since your business is one element in a network of other businesses, it’s important for you to be able to communicate both your capacities and your expectations to the people you rely on. A budget serves as a tool for facilitating such communication. It gives you a concrete way of describing not only where you stand, but also where you will stand in a given scenario. Thus, it helps foster strong partnerships and avoid uncomfortable conversations.

This doesn’t mean sharing every detail of your budget, nor does it mean sharing some details with everyone. It simply means that guarding your budget like a state secret takes away some of its efficacy. You can use select portions of your budget to assist you in negotiating with critical partners-i.e., you can be prudent about the information you divulge without being obscure. How much do your current business partners know about your budget? Is it enough for them to understand your capacities and your needs?

The Bank

Speaking of business relationships: you don’t want to mess around with the bank. Plain and simple. This is a relationship that should be as friendly and open as possible. And what do bankers like? Budgets. As the American Bankers Association (ABA) says, “You are flying in the dark financially if you don’t have a budget for all income and expenses.”

Come to them without a budget, and bankers are going to feel like you’re wasting their time. They’re certainly not going to be interested in loaning you money (or more money). “Prepare for your financial review with your banker,” says ABA. “Have current inventories, cash flows and balance sheets ready.”

When your banker asks you how your debt is structured, and whether you have an imbalance between long- and short-term debt, what are you going answer? Trust us: if you show up to that meeting with a budget, you’ll be glad you did.

Flexibility

Just as the market’s unpredictability makes budgets useful, it also makes them fallible. A budget is like any plan: it will contain inaccurate predictions and require ongoing revision. That’s simply a condition of commerce; some academic models are predicated on entrepreneurs having perfect foresight, but we all know that’s not the case. Businesspeople, even the world’s most celebrated financial prognosticators, get it wrong sometimes.

That doesn’t render planning completely useless. Even if your plans don’t entirely match the way reality unfolds, they serve as benchmarks against which you can assess your progress. They record where you wanted to go, where you actually went, and why the two didn’t coincide. In that way, they indicate which areas of your business are performing well, and which need to be modified in order to meet next quarter’s goals.

When it comes to small-business planning, certainty is off the table. Nothing is guaranteed, including budgets. But setting expectations and monitoring progress remain indispensable to long-term survival. They help small-business owners analyze why they’re drifting off course, and also help them formulate corrective measures.

How do you see a budget? As a static report that turns old news into flimsy predictions? Or as a series of living documents that records how you adapt to change?

Personnel

Thorough budgeting calls for a great deal of effort, and many small-business owners can’t spare the necessary time or energy. Frankly, while the minutiae of budgeting are of interest to the entrepreneur, they are not the entrepreneur’s main job. If they were, then a good head for numbers and a background in financial analysis would be prerequisites for entrepreneurship. Yet plenty of small-business owners have succeeded without an affinity for mathematics or statistics. Entrepreneurs don’t all begin as certified public accountants.

That being the case, most small-business owners hire a bookkeeper. A bookkeeper collects and organizes your financial information, which, again, is time-consuming and requires close attention to detail. Too much time and too much attention for small-business owners to sacrifice. But even if you’re not involved with gathering and sorting your financial information, you needn’t remain aloof from it. To get the most benefit from budgeting, you’ll want to be accustomed to reading your financial statements and locating important data in your financial system. When you meet with your bookkeeper, are you talking about his or her methods? Is he or she showing you how your financial information is organized? Are you able to navigate your bookkeeping software on your own, so as to pull up specific pieces of data without your bookkeeper’s assistance?

Proper bookkeeping is important, but it rarely goes far enough in the analysis department. You’ll notice that the bulk of our discussion has revolved around using budgets to orient yourself in the market-i.e., using them to take advantage of opportunities and to minimize risks. That requires more than tabulating numbers; it requires interpreting them. It requires fitting your numbers into a larger picture.

Is there anyone in your organization besides you who (1) monitors your finances on the close-in, detailed level, and (2) relates the details of your finances to your big-picture performance? If not, chances are you’d benefit from a dedicated financial person. Someone whose duties involve painting a comprehensive picture of your financial universe-more comprehensive, that is, than the picture you’re able to paint on your own, simply because you have other things to do.

As with most aspects of running a small business, getting the most out of budgeting requires skillful delegation. If a budget is going to inform your decisions at major turning points, then it’s a good idea to have someone to consult with, someone who’s been looking at the same numbers as you while also looking at the same problems.

Takeaway

The value of a budget doesn’t rest on the accuracy of its predictions or the stringency of its cost-cutting. Instead, the value of a budget rests on how well it articulates your business’s financial strengths and weaknesses. A budget exists to help you balance risk against opportunity, to help you determine whether aggressive or conservative action is the right thing for the moment. It also exists to help you communicate with your business partners-to, in other words, cultivate healthy, mutually beneficial relationships with the organizations you rely on.

Above all, a budget exists to de-mystify, or express in concrete terms, the limitations imposed on your business by the market. Thorough budgeting, especially when undertaken with the right personnel, can enhance your creative initiatives and merge adaptability with profit. In short, budgeting is a way to sharpen, not blunt, a small business’s advantages.

Citations

American Bankers Association. Ten tips for small business owners during tough financial times. http://www.aba.com/Press+Room/PR_Small_Business_troubledtimestips.htm.

Field, Anne. 2010. How to budget and manage inventory for 2011. Inc. http://www.inc.com/guides/2010/10/how-to-budget-and-manage-inventory-for-2011.html.

Posted in |

Travel Guides For Budget Travelers?

 How many times that while out traveling in Asia that I see budget travelers clutching their travel guide books like some sort of oracle in print that will deliver them to the perfect holiday vacation.  For seasoned travelers they know the part is never in the book but right in front of them in real life color.

In Asia many times the books are only partially updated and much of the information is dated, especially when it comes to the prices, which hey if you are a budget traveler is very important information, if you are going to remain on target for your travel goals.  Who really wants to get a job when they are traveling because the estimates they made were based on dated information? Unless that was part of the plan to begin with for instance, when they are going to Australia if they are from Untied Kingdom or Canada, but even then having current information is vital.

 
Travel guides come in 3 basic varieties the most commonly used being books and internet sites that are often times connected to the books, and periodical travel magazines.  There are also travel companies that are travel guides, but for most budget travelers this is a more expensive way to travel as opposed to being self directed they can be a good option if your time is limited and you want to jam a lot in but your on vacation not at work, so take it easy should be your mantra. The travel guides that you chose should give you ideas and then you take it from there.
 
Where to get the most current information?
 
Budget travelers many times move on the same routes some coming in while others are going out. Look for the local areas where the other budget travelers are is going to get you the most current information.  In Bangkok the best places to meet fellow adventurers would be Khoa San Road or on Suhkumvitt between Soi 4 and Soi 56.  In Phnom Penh the lakeside or riverfront areas would be the best place to find them. In Bali try Kuta anywhere near the water especially when the waves are up! Saigon your best bet is in the Pham Ngu Loa district. In Sydney try the Kings Cross section or near the beach in Maruba. In Beijing try the south side of the Forbidden City. In Singapore the Little India section of the city is where the most backpackers call home.  If somewhere not listed, again, ask the fellow travelers.

 
The other place to get the most current information is on the internet. Blogs and forums are a good place to start as they usually have the most up to date information and if you give your email people can connect direct with you.

Posted in |

Money Budgeting Guide

Learning a money budgeting system is a critical first step to take control over your finances. Today, more than ever, you need to handle your money carefully and wisely. In case you’re having second thoughts about setting up a budget, remember that either you manage your money, or let your money manage you.

“The way you handle money budgeting will determine whether you’ll spend your life on the passenger seat, or on the driver seat”

Did you know that money is the leading cause of disagreements in marriages? This is reason enough to organize your personal expenses through a financial plan. Having a money budgeting plan opens your eyes, puts things into perspective, and helps you establish priorities. When you start tracking your personal spending you’ll realize that those little things add up quickly. Your trip to Starbucks five times a week can add up to $750 a year.

Setting Up a Budget

In order to simplify your money budgeting process, you should have separate folders/envelopes for all records of your income and home expenses such as: bank statements, investment accounts, utility bills, receipts, etc. Then, on a personal spreadsheet (i.e. Excel), start entering each item in the appropriate column.

When making a finance household budget, you should include 3 elements: Income, Personal Expenses, and Financial Goals.

1. Monthly Income: Salary, investments, other income (rental properties, etc.)

2. Monthly Expenses – Fixed – These are expenses that stay the same or change very little each month, such as food, clothing, laundry/cleaning, utilities, telephone/mobile, satellite/cable TV, household expenses, health care, insurance, loans, education, entertainment, personal care, rent/mortgage, travel, gifts, medical expenses, child care, taxes, etc. These are for the most part, essential home expenses.

3. Monthly Expenses – Variable – These are expenses that change each month, such as gasoline, car repairs, etc. Here’s where you can make some adjustments in your personal family budgeting if you need to reduce home expenses.

As soon as possible, start setting aside money for these “unexpected” personal expenditures. This will make your life a lot easier without the stressful “unforeseen circumstances” of life

Personal Home Budget Goals -Knowing how to budget money and maintaining a money budgeting program is not enough incentive to keep you motivated, you need to set your own financial goals to keep you moving forward until you accomplish them.

Why You Need A Budget

You need a finance household budget to know where each dollar is coming from and where it’s going. You also need to develop a financial plan for consistency; this is crucial to achieve your financial goals. Look at the benefits of learning how to money budgeting:

  • You know where you are and how far you need to go
  • Getting organized frees up your time
  • You have control of your money
  • Helps you to avoid arguments about money
  • Gives you a better idea of what you can afford
  • Gives you piece of mind
  • Eliminates your debts
  • Gives you additional money
  • Helps you achieve your financial goals

You should keep track of your home expenses for at least one month. You can then calculate how much money you have left over after subtracting all your personal expenses from your income. If you have extra money, you can use it to pay off debts, set it aside for savings or investments.

If you’re having problems staying within your personal spending program, then you need to find some areas where you can cut down your expenses. Here are a few examples:

  • Carpooling to work
  • Bring lunch to work
  • Eat out less often
  • Find a cheaper phone plan
  • Switch to a basic Satellite/Cable TV plan
  • Shop around for lower insurance rates
  • Consolidate your loans to lock in lower rates

Another option is to increase your income. Consider renting a room, getting a part-time job on weekends, or provide a service a couple of days a week using your skills.

Learning money budgeting and living on a budget is not easy at the beginning, but the rewards are worth the effort. You just need to stick to it until you can see some satisfactory results. Getting to this stage of personal money control will give you an incentive to continue improving your financial outlook. Lastly, you have another option: software budgeting.

Posted in |