It’s the start of a new year and larger companies will have their budgets done, or almost done. Yet, in most owner-managed businesses there are no budgets or forecasts. Ask them why and they’ll give you all sorts of reasons. They haven’t got time. The current climate is so uncertain its nearly impossible to get it right. They haven’t got all the information they need yet. None of these reasons are valid. There are important benefits of budgeting.
If something is important and worthwhile, you make the time for it. If you think you haven’t got the time, that means it’s either unimportant or not worth the effort. Here is why an interesting reason you should consider budgeting serious.
In uncertain times, it even more important to understand your business and to have a reasonable appreciation of how it will perform in good, medium or poor conditions. You should be taking actions that will make your business better able to understand the uncertainty, rather than waiting impotently.
If you haven’t got all the information, then you need to identity the key information and get it. The only way to do that is to starting your budgeting/planning process.
A budget is not about the end document. Yes, thats important. But what’s more important, and more beneficial, is the process you go through to prepare a budget.
You need to understand what the business is selling and what resources are used up making those sales.
You need to know what these resources will cost you in the coming year.
Plus, you need to understand what overheads you have and what they are going to cost in the coming year.
You need to be clear on what assumptions you are making and which of those the most critical.
You need to understand your payment terms – both incoming and outgoing – and what effect these have on your cashflows.
Overall, the earlier the warning you have of any problems, the better positioned you are. A good budget or business plan should flag up any issues you need to be paying attention to.
The process of doing your business plan should be looked at as part of your learning process.
You set out your budget or plan that tells you where you expect to be at various points in the year. As you go through the year you check to see where you are and how does that compare to where you thought you’d be.
If the differences are significant, you need to investigate and understand where you got it wrong. Out of this, your understanding of your business will grow and your ability to predict will improve.
Bottom line, there are more benefits of budgeting or planning.