Draw up a rational budget, stick to it
March 19, 2012
By James Leavelle, ASU-SBDC Business Development Specialist
SAN ANGELO, Texas — What is a budget?
As a small-business owner, you may have needed some sort of financial assistance to get started. This assistance could have been a commercial loan from a bank, a loan from a private investor, or an investment directly into your business by someone.
Most likely, before you were given the loan or investment, you were requested to provide a business plan. In your business plan, you probably provided some cash flow projections and other financial projections.
In essence, you were creating your budget for the next year. You were telling your lender or investor that this is what you expect your revenues and expenses to be in a given month during the next year.
On what did you base those numbers? Wild ideas? Educated guesses? Hopefully, you based them on your knowledge of your business and its related industry. And, you took into account any effects seasonality may have on your business. (That sounds a lot like a budget.)
Consequently, a lender or investor believed in you and your plan, or they would not have financed your venture. So, what is a budget?
Webster’s dictionary offer’s this as one definition, “a statement of the financial position of an administration for a definite period of time based on estimates of expenditures during the period and proposals for financing them.” Where Webster says “administration,” substitute the word “business.” From this definition, we see that a budget is more than just a moving target we hope to hit. It is a financial plan.
The former president and CEO of a local company would chide store managers and district managers when budgeted sales were not met or for exceeding budgeted expenses. He was well known for saying a budget was not a target, but it was a financial document served as a statement to lenders and investors the company would perform at this level. When the company didn’t meet budget, it was letting lenders and investors down.
As a financial document, the budget also is a yardstick that measures performance. On a month-by-month basis, you can compare your revenues and expenses to your budget. Are you meeting budget? Are you exceeding budget in revenues, and below budget in expenses? If so, there’s a good chance you are profitable.
You should be reviewing, revising and rewriting your budget on an annual basis. At the same time, review, revise and rewrite your business plan to reflect your current business model. The business that routinely creates and sticks to a budget has a good chance at success. And, when it comes time to expand the business, it can present this financial document to a lender in an application package and feel confident in a greater likelihood that the lender will support the application.
For assistance in creating or working with your business budget, contact one of the advisers at the ASU Small Business Development Center.
“Business Tips” was written by James Leavelle, Business Development Specialist of Angelo State University’s Small Business Development Center. Contact him atJames.Leavelle@angelo.edu.