It is safe to say that people start businesses for many different reasons:
- Maybe someone loves doing something so much that he just had to take a risk and build a business around that passion
- It might be someone who always longed to be her own boss and when the opportunity arose, she took it
- It may be that they are what we call “accidental entrepreneurs”- people who lost their job, whose unemployment ran out, and who had no other choice
Whatever the reason, you can safely assume that all different types of entrepreneurs have one thing in common: They probably didn’t go into business because they love crunching numbers and making budgets (unless, of course, the entrepreneur is an accountant, but I digress.)
But budgeting is one of those things that business people usually learn to do, sooner or later, because they have to, because staying afloat and being professional requires it. For newer businesses especially, budgets are often something to be endured at best and avoided at worst. Since there are so many other things to do in the start-up phase, projecting and budgeting can easily be put off for another day.
However, that is a big mistake. Think of it this way – would you ever get in your car, put a bag over your head, and drive off? Of course not. With a bag over your head, you would never know if you were headed in the right direction, you couldn’t see any dangers down the road, and you wouldn’t even know if you had enough gas to get where you wanted to go.
That is exactly the same situation when you run a business without a budget. Without a budget, you might have a vague idea of your cash flow, profitability, and money situation, but you don’t really know if you have enough money to get where you want to go. Creating a budget allows you to take the bag off of your head, get your bearings, and head in the right direction with the confidence you need to make smart decisions.
Often, new entrepreneurs learn about budgeting the hard way. In the early stages of a business, cash flow is usually an issue. Money comes in, some bills get paid, others don’t, and budgeting for the future is put off. The problem is that with cash flow so erratic, the new entrepreneur without a budget has no tool to help him or her analyze how best to use their money. Should they invest in that Google Adwords campaign, and if so, how much? Can they afford to hire that independent contractor? Without a budget, it is really tough to know.
Let me also suggest that another reason why many small business people put off budgeting is simply because of the word itself: “budget.” Not a lot of people like that word, entrepreneurs especially. Budgeting often connotes restriction, and especially with the freedom that entrepreneurship can bring, constraint can feel alien.
So consider this instead: Substitute the word “plan” for “budget.” Because, really, that is all that a budget is; it is your financial plan for your business. Would you like to grow your business this year? Great, then you probably need to spend more on advertising and marketing. Make that part of your plan. Are you spending too much on labor? OK, make that part of your plan too.
Here is the easy way to do it: For three months, track all of your spending. Create as many categories as you can and faithfully record where you are spending your money right now. There are many excellent software programs you can use, such as Quickbooks, Peachtree, or Freshbooks. You could also simply create a spreadsheet using Excel.
Then, analyze the data. By taking the paper bag off of your head and seeing where you are headed, you will be better able to make a course correction. Want to spend more on new equipment? Then maybe you can cut back on transportation costs. Perhaps you see that you are spending too little on labor, or too much on insurance. Whatever the case, by analyzing your spending you will now be able to make smarter, better, more informed decisions.
If you are unsure how much to spend on different categories, ask yourself these two questions:
- How much do you need to keep the doors open? (rent, labor, taxes, insurance, etc.)
- What spending will give you the biggest bang for your buck?
In the beginning, this is a matter of trial and error, but after a while you will see what works best for you and your business. Double down on that.
After all, it is your budget – err, I mean plan – and you can use your money however you want.
About Steve Strauss
Steven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest,The Small Business Bible, now out in a completely updated third edition. You can listen to his weekly podcast, Small Business Success, visit his new website TheSelfEmployed, and follow him on Twitter. © Steven D. Strauss.