Running On A Budget

How would you define the word budget? Budget is an itemized forecast of an individual's or company's income and expenses expected for some period in the future. Most entrepreneurs detest the idea of budgeting. Some entrepreneurs feel that working on a budget limits their actions and affects their flexibility. However if we are going to look at the current economic trend, budgets would be crucial to a business.

Entrepreneurs will always find an excuse to avoid budgeting. The most typical excuse that you will hear would be,” “Startup cash flow is too unpredictable.” I know that not all of you are keen on budgeting, but you should start learning. Here are two reasons why:

1. It makes good managers. If budgets are done properly, it will enhance your ability to forecast and manage. For a startup, business budgets can be used to test whether the drivers of the business hold true. One effective way of doing this is by setting an annual budget with a set of key assumptions (number of new clients, product price, etc.). Then every quarter try to reforecast by updating the assumptions you made with the latest results at hand.

2. You avoid the risk of running out of money. Most startup businesses run the risk of running out of money. Most entrepreneurs will fluctuate between a conservative reality and an aggressive dream state, which keeps them motivated and helps them inspire others. If you are going to formulate a budget plan, start with projected expenses and not revenue. Expenses are much easier to forecast. This will keep you grounded so you do not run the risk of running out of money.

Starting and running a business within a budget is not easy. You should be willing to be flexible. For instance, if the revenue does not match your expectations, trim back your expenses to compensate. On the other hand if you are earning more than you anticipated, now is the time to invest in those business development measures you have been putting off so far.

Budgeting requires you to look ahead and formalize future goals. By establishing a budget, you can set goals for achieving a certain level of income and monitor your expenses.