Learn to love budgeting. Yes, you!

Let’s be honest – most business owners don’t create budgets.

This is understandable. It is also insane. A recent article by Joe Wollenweber, a senior coach with E-Myth Worldwide, explains why…

Business owners may have ideas about the future. They may have numbers scrawled on napkins or whiteboards and a general sense of where they are heading financially, but they haven’t understood the importance of a budget process.

Budgeting is hugely important, and so is reconciling a budget as part of your financial discipline. And it’s simple.

For some of us, even the word ‘budget’ makes us bristle. Try ‘Profit Plan’ instead. Your budget is a proactive tool for ensuring your business creates value and so generates a profit.

Clearing the windscreen

Nearly all larger, successful businesses that operate from the top down have budgets firmly in place. Nearly all successful small business owners have begun to recognise true growth and development only after they have begun to embrace the strategic planning power of their Profit Plan. You can sleep easy at night if you understand every number on your P&L and if you have a clear, quantitative plan for how to produce more profits.

Many business owners may have a decent P&L, but they soon learn that reviewing these is like looking in the rear view mirror. The P&L (or income statement) is a historical document. It shows you where you’ve been, but doesn’t give you any idea where you’re going.

Once you engage in budgeting (profit planning), however, you start to see the business through the windscreen. It might be a murky windscreen at first, but as you gather skills and think more about the numbers and the various activities of the business, it will gradually become crystal clear. 

This newfound financial intelligence gives you a sense of control. And it’s the budgeting process (coupled with cash planning) that allows you to soar.

Just try it

You simply need to begin. Organise your P&L into understandable accounts or line items and look at them. Think about what each line means.

This is what the budget process is all about: getting you to work with your numbers routinely – to think about them, so you understand them and, over time, learn to forecast the future with increasing accuracy and confidence.

Start with a piece of paper, or a spreadsheet, with columns for your forecast, the actuals, and the difference (variance), along with plenty of extra space to explain your assumptions about the variance.

Maybe at first you can’t see far at first, but you’ll get better. Forecasts consist of projections about the past (using that P&L) and predictions about the future. Look at your histor: are things going to be the same, or different? Think about the future and what you can predict. Have your sales systems achieving better results; are you getting more leads? Will these bring more revenue? If you think so, forecast it. Don’t worry if you’re right or wrong.

At the end of the month, write in what actually happened. Now, instead of staring blankly at the rows of numbers your bookkeeper or accountant provided, you’re looking at the truth – the actual results compared with your best guesses. Think about where you were exactly right. Think about where you were wrong. This way, you’re thinking about every single line item, every single aspect of the business through the numbers. Spend an hour or two each month reviewing the way you think about the business, and explaining to yourself what went right or wrong.

That’s basically all there is to budgeting.

• Step 1:  Get inspired
• Step 2:  Do it
• Step 3:  Do it consistently and watch your financial intelligence grow

For the full article, go to E-Myth. Do let me know how you get on.