For 35+ years I have worked with small business owners and watched them. This has allowed me to learn many things that worked and a whole bunch of things that don’t. This is my 20th year running my own CPA firm and I have to confess I have repeated many of the mistakes I watched others make. Heck, since I tend to be creative, I even made a few new ones of my own.
This is the first in a new series sharing some of these lessons with you. I will start with the “myth” that most startup business owners believe and follow that with the “hidden truth” that successful business owners learn the hard way. Finally, I will finish with a business lesson to be learned.
So, let’s start ………………
Budgets – The secret to survival!
The myth most business owners believe: If you know your business, budgets are only needed by the bank when you are applying for a loan.
The truth successful business owners learn the hard way: Running a successful business requires attention to a huge amount of moving parts that seldom fall together correctly. Even the smallest business will run into cash flow problems because of the business cycle. Large growing companies are almost guaranteed to run into cashflow problems at one time or another.
In the past three years, I have met with many small construction companies who learned the “business cycle” the hard way when they won a contract at Ft. Bliss. Once they started the contract, they quickly learned that they had to pay upfront for materials and labor and that it often took 45-90 days to get paid. A quick budget would have helped them see this problem ahead of time.
What they didn’t understand is that budgets are critical to every business owner’s success! Operating without a budget is like starting off on a journey without any idea how to get to where you are going. Sounds like fun but often ends up as a disaster. A budget helps you plan to be a success rather than hoping for success.
When you budget (and I mean real-life budgeting – not Government pretend budgeting!) you actually sit down and figure out:
- what you are going to do in order to get the sales you need to be a success,
- what costs are absolutely necessary to deliver your product efficiently,
- what staffing that is needed to attain this budgeted income,
- what financing might you need during slow times.
Finally, a budget helps you stay on track. Successful business owner’s review every month what actually happened against their budget and then make the necessary adjustments needed to reach their goals. You would be amazed how many business owners only discover that they made a profit when I do the tax return after the year end. By then it is way too late to adjust for changing business circumstances.
Lesson learned: Budgeting is a waste of time only if you don’t plan on making money!