For many businesses the start of the fourth quarter kicks off the process of creating an annual business budget for the following year.
But it's not uncommon for owners of smaller businesses to skip creating a business budget entirely. Tony Drockton, founder of Los Angeles-based designer handbag firm Hammett, says he didn't budget in his two previous entrepreneurial ventures.
“I shook trees and money fell from them and I thought it would just keep falling," Drockton says.
But those previous ventures failed when economic conditions soured, something he says a lack of budgeting probably contributed to.
“Because I didn't properly budget, I didn't allow for the rainy day and I ended up losing both of those companies," he says.
Since founding Hammitt in 2008, Drockton has become a careful budgeter.
Other business owners and experts endorse that approach.
If you stick too tight to your annual budget on a quarterly or monthly basis, you may overspend where you shouldn't and underspend on areas that crop up during the year that provide the biggest opportunity.
—Tony Drockton, founder, Hammett
Dan Granger, founder and CEO of Los Angeles-based marketing agency Oxford Road, says that along with helping respond to challenges, budgeting gives business owners a source of feedback to determine what is working.
“If you're not budgeting it's going to be very difficult to know if you're successful," Granger says.
Robert Morlot, managing partner of business consulting firm Clearwater Business Advisers in Clearwater, Florida, says owners who don't have a business budget are missing critical insight.
“Unless you know the numbers, you don't really know your business," Morlot says. “And budgeting is part of the process."
Benefits of a Better Business Budget
“You don't know how to fix the problems unless you see where the problems are," Morlot says. “You have to keep score. That's what your budget lets you do."
Having a business plan including a budget is also essential for businesses seeking loans or investors.
“If you want investment money, you're going to have to show people what you're doing," Morlot says.
A good budget suggests performance benchmarks that can be used to incentivize employees, Morlot adds. And some customers, including government buyers and big retailers, only do business with you if you can show that you manage your business budget well.
“They don't want to do business with somebody who doesn't know what they're doing," Morlot says. “They'll crawl all over your business to see if you do. If they deem you're not ready, they'll just go on to the next vendor."
Business Budget Basics: Costs, Limits, Risks and Solutions
That said, time spent managing your business budget is time not spent getting customers or producing goods and services. That may be why some business owners don't make the attempt.
“You can spend too much time on it," Morlot agrees. “The question is how much is too much time."
Technology can significantly reduce time spent budgeting. Cloud-based accounting tools can provide advanced budgeting features that can help businesses apply sophisticated analytical and forecasting tools without undue effort.
Digitalization of business also makes it easier and faster to get the necessary data, Morlot says.
Another risk of budgeting is that the long-term plan will become a straitjacket that restricts rather than increases short-term flexibility.
“If you stick too tight to your annual budget on a quarterly or monthly basis, you may overspend where you shouldn't and underspend on areas that crop up during the year that provide the biggest opportunity," Drockton says.
The major risk of budgeting, however, is that it requires guessing about an unknown future that may not come to pass. While many costs such as rent and utilities are unlikely to fluctuate much, revenue projections are far more difficult to make accurately, affecting your business budget.
Business owners have a number of tools to help hone forecasts. Many start with last year's budget amounts and estimate how much each will vary. Business owners new to budgeting can use averages from last period's actual costs and revenues as starting points, Granger suggests.
Business owners can build in flexibility in their business budget by contemplating how they might respond to specific developments, like losing or gaining a major customer or market.
“Do some scenario planning," Granger urges. “If the business grows to X, you can expand to Y."
Zero-base budgeting is a method that calls for scrutinizing line-item expenses to determine whether they could be adjusted or dispensed with entirely. Granger uses this strategy for his own company.
“It adds more accountability and forces us to question why we spend money on the things we do," he says.
Another method of improving forecast and budget accuracy is to, in effect, crowdsource it by involving other people in the company.
“Spread the risk by getting different perspectives on it," Morlot suggests.
Budgeters can study economic forecasts for clues as to future trends in markets and costs. Another way to keep their business budget on target is to update them to reflect new developments. If trade and tariff wars escalate, for instance, growth rates could slip, which could have an effect on a business budget.
Your Business Budget in 2019
Perhaps the biggest reason why it is important to manage your business budget now is that the economic expansion that began in 2009 will, if it lasts to summer 2019, be the longest U.S. expansion ever. That doesn't mean it won't continue, but it highlights the need for vigilance and care.
“We've had a very good economy for a long time," Granger says. “The further we get into this, being intentional on budgeting is increasingly important. There's never been a more important time to plan ahead."
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