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 smoothly. Even the smallest businesses will run into cash flow problems simply because of the business cycle. Growing companies are almost guaranteed to run into cash flow problems at one time or another.
In the past three years, I have met with many small construction companies who learned the nature of the business cycle the hard way after winning a contract at Ft. Bliss. Once they started work on the contract, they quickly learned that they had to pay upfront for materials and labor, and that it often took up to 90 days to get paid. A quick budget would have helped them plan for 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-style 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 is needed to attain this budgeted income
- what financing you might need during slow times
Finally, a budget helps you stay on track. Successful business owners review what actually happened against their budget every month, and make the necessary adjustments 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 at the end of the year. 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!