What would happen to your business if you never set-up a budget — ever
If you’re like a lot of small business owners, you’ve probably wondered why setting up a yearly budget is that important.
Maybe you’ve decided that cash flow monitoring and forecasting is something you would rather put off for now. You’d rather spend your time creating the next best widget.
In truth, there’s much contradictory information floating around out there around budgeting.
That’s why we rolled up our sleeves and uncovered what the talk is on the streets around budgeting for small business owners.
And what we discovered is that the jury is out.
Then you’ll be even more interested to learn that 61% of small business owners did not create an official, formally documented budget in 2018.
But before we delve into the research, get ready to discover why,
Small Businesses Hate Budgets and Budgeting
Because they think budgeting is restrictive, something that will tie them down to a rigid structure.
They feel a budget will cramp their creativity and business growth. They want the room to flow with their ideas and, in truth, don’t want to be held accountable.
For others, their cash flow management skills are woefully lacking. They venture out into the marketplace with little to no money and price their products and services way too high or low.
They learn the hard way that if their expenses exceed their cash flow, they have a cash flow problem. Having a budget would help them avoid running out of money too fast, if at all.
But based on these statistics in 2018, a lot of small businesses didn’t get the memo.
Research from Clutch.co in 2018 revealed that;
- Nearly two-thirds of small businesses (61%) chose not to create aformally documented budget.
- They also discovered that smaller businesses were more likely to skip making a budget altogether. Nearly three-quarters of small businesses with 1 to 10 employees (74%) did not create an official budget, compared to a meager 21% of small businesses with more than ten employees.
- Among those small businesses that did create a budget, more than one-third (37%) spent more than they budgeted in Q1 and Q2, and
- One in five businesses that did budget (20%) planned to increase their budget from 2019.
Based on these statistics, it begs the question, is setting up a budget realistic?
If 37% of small businesses spent more than they planned and 20% of small businesses found they needed to increase their budget, then what is the point of having a budget in the first place?
These figures prove that budgeting doesn’t work, or more small businesses would create one.
Maybe they do, maybe they don’t.
Soon we will discover how small businesses keep an eye on their monthly cash flow without going nuts.
But before we do, let’s take a closer look into why 61% of small businesses chose not to create aformally documented budget. And why other smaller businesses skipped making a budget altogether.
Why Budgeting Doesn’t Work for Some
A household budget is easy to set up. But suppose a small business owner has little to no bookkeeping training. In that case, setting up a budget for their business is daunting.
There are so many expense categories to figure out it can make your head spin.
Another thing that small businesses discover is that their information may not be accurate. As their business grows, it gets more challenging to get precise information.
Discovering, usually too late, that what is happening, in reality, is far from what the numbers reveal.
But the most significant waste of time when it comes to budgeting is believing that selling more when cash flow is low solves all ills. It causes more problems than it solves.
Entrepreneur.com author Tim Berry wrote that his most challenging years were when his business doubled in sales. This sudden boost nearly broke them. They were building things two months in advance and receiving payment six months down the road. Be careful, he warns; growth costs cash flow. The faster you grow, the more financing you need.
And that’s where healthy budgeting habits come in.
I hope Tim Berry’s cautionary tale has changed your mind (even if just a little bit) to the idea of setting up a budget.
For sure, budgeting takes time and is tedious to set up at first, but the simple fact is you must take time out of your busy schedule to put a budget together.
Should you need support in setting up a budget, we can help. To give you a sneak peek at what a smoothly run budget looks like, I reveal,
The best protocol savvy small businesses use for Budgeting
What they do is:
a) Categorize their spending: They know what they’re spending and where they are spending it. Savvy small businesses categorize their expenses into General & Administrative, Research and Developement, Sales and Marketing, Operations, Cost of Goods, etc.
Once completed, they take a good look at the figures and see if anything stands out. They consider the percentage spent in each category and analyze whether cash flow distribution makes sense, and adjust accordingly. Then they,
b) Benchmark: They research how other businesses are spending their hard-earned cash flow. And are smart enough to use those budgeting parameters within their businesses.
They only consider businesses within their industry and their own company’s lifecycle stage. Top of mind is keeping their spending within their means. Regardless of others’ benchmarks, they are smart enough to adjust accordingly based on their available cash. And finally they,
c) Micromanage their spending. I know, I know. No-one wants to cramp your style. Just hear me out.
You heard the saying, ‘It takes money to make money’?
This foolhardy mantra has hurt more businesses than I care to recall. Yet savvy small business owners appreciate that if they were not to keep a close eye on their cash-flow they would easily fall prey to gross overspending.
It takes a lot of cash flow initially, but they know that not all expenses are created equal. They understand that every dollar spent detracts from their profit margins, so consider the cost-benefit of every single item they buy.
Still Not Setting-Up a Budget?
True. You can always depend on your monthly profit reports, balance sheets, and cash flow statements to tell you what is going on in your business.
These excellent financial statements do provide detailed information about the health of your business for sure.
And these same reports are used for forecasting your business’ financial health as you advance.
But how can you forecast if you don’t have a budget set-up?
Sure, a CPA can tell you what’s going on. But imagine what it would feel like to have an understanding all for yourself.
Being in complete control is why you became an entrepreneur, so why not bite the bullet and make friends with your budget?
I promise they it won’t bite!
The Top Five Reasons Why Small Businesses
Chose to Budget
- To set goals for sales
- To track expenses
- To prepare for emergencies and unexpected situations
- To monitor progress throughout the year, and
- Enjoy peace of mind.
The whole point of this article was to encourage you to set up a budget or show you how to keep a closer eye on your budget should you have one.
Maybe, you started out thinking that Budgeting doesn’t work. I hope that you realize that you need to put one in place as soon as possible for the sake of your business’ health.
I don’t necessarily expect you to master QuickBooks overnight.
Instead, it would be helpful if you set-up a simple excel spreadsheet. And slowly got familiar with the category codes for your business; that would be a fantastic start.
And you may consider contacting us for support. We would be glad to help you.
So go ahead and make a start – you may find you enjoy number crunching more than you thought!