In the world of small businesses, where every penny counts, creating and implementing a monthly budget can be a game-changer. It’s not just a mundane financial task…okay, it can be mundane, but it’s also a strategic tool that can significantly contribute to a business’s success.
In this blog post, we’ll explore why monthly budgeting is crucial for small businesses, the potential consequences of not having one and how new business owners can take the first step towards creating the best budget for their ventures.
Why Monthly Budgeting Matters
Monthly budgeting serves as the financial roadmap for a small business. It allows you to plan and allocate resources wisely. Essentially, you get to tell your money where you want it to go. In fact, I like to call it a Profitability Roadmap, because I know some folks dislike the “B” word. With a budget, you can better ensure that your business’s revenue is distributed to cover essential expenses like payroll, software, supplies, equipment, and outsourcing those services outside of your wheelhouse (marketing, financial services, IT, etc.). Beyond that, it allows you to plan where you would like to cut costs and/ or reallocate funds so the business operates more efficiently.
The Detriment of Neglecting a Budget
The absence of a budget, even a simple one, can take a small business off course and literally spell disaster. Imagine driving to Ontario Canada when you meant to go to Orlando, Florida. You haven’t packed appropriately and you won’t get to see Mickey! Without a financial plan, your business can wind up way off course. But, with a well-thought-out budget, you have a guardrail (one you created) to help keep you on the right path to your goal. Furthermore, a good budget enables you to weather economic downturns, invest in growth, and make more informed decisions.
Let’s offer an example of the possible consequences of NOT creating a profitability roadmap (budget) for your business.
Don’t Be Like Terri
Meet Terri, a smart, enthusiastic entrepreneur who recently launched her own small, local bakery. Focused on perfecting her recipes and delivering delicious treats to her customers, Terri overlooked the importance of creating a monthly budget for her bakery.
In the absence of a budget, Terri faced several challenges:
1. Unpredictable Cash Flow and Overspending
Without a budget, Terri couldn’t anticipate her monthly expenses accurately. As a result, the business often had more money going out than was coming in. State-of-the-art equipment was purchased on a hope and a prayer that the business could cover the costs. There was no plan or guardrail to curb impulsive overspending, or just spending. The inability to track and control expenses resulted in a dwindling bank balance and mounting credit card debt.
Terri struggled to pay rent, utilities, and her employees on time, leading to late fees, a strained relationship with her landlord and staff, and a LOT of stress.
2. Missed Growth Opportunities
Terri was so preoccupied with day-to-day operations that she missed out on opportunities to expand her bakery. She could have explored catering, grown her wholesale distribution business, or launched an online store, but her financial disarray prevented her from pursuing these avenues. Her lack of planning created complexities and inefficiencies that slowed the business’s growth.
3. Stress and Burnout
The constant financial uncertainty and stress took a toll on Terri’s health and well-being. The joy she once found in baking began to wane as she grappled with mounting financial pressures.
4. Lack of Preparedness for Emergencies
When unexpected challenges, such as equipment breakdowns, wholesale clients who didn’t pay on time, or global pandemics arose, Terri had no financial cushion to rely on because she hadn’t planned one into existence.
Don’t be like Terri. Neglecting a budget can leave your business in a mess.
It’s Easy to Start a Budget
So, how do you even begin thinking about a budget? If you have an existing business, the simplest way is to start where you are right now. This time of year (Q4) is a great time to start. If you have a P&L or profit and loss statement for this year, this is where you begin. Go line by line looking at income and expenses for your business. Ask yourself, what do you expect will remain the same in 2024? What will be different? If you don’t have a P&L statement, the exercise is the same. Take a look at this year; your current revenue, your current expenses and answer those same questions. Use this to create your budget.
For new business owners just getting started, embarking on the budgeting journey might seem daunting, but it’s essential for anticipating expenses. You may think you have it all in your head, but getting it down on paper or in an Excel or Google spreadsheet will help you identify and anticipate more of the business’s expenses which means less stress for you later on.
Don’t expect perfection. Things will change because life always does. However, if you lead with your budget in hand, you will be better prepared for the changes.
Q4 is a great time of the year to plan for next year. It is a great time to but really, anytime is a good time to create a budget if you don’t have one. The benefit of the fourth quarter is that it often aligns with the time of the year when businesses reflect on the past year, assess performance and plan and set goals for the new year.
Need help planning and setting up a budget? We’re here to help. As business solutions experts, we have helped dozens of businesses untangle complex issues and clarify a path to greater profitability. Schedule a Discovery Session to learn more.