Part III “Budgeting”
It’s often been said in one fashion or another that “if you are failing to plan, then you are planning to fail”. None of us like the idea of failing at something that we set out to achieve, and only a select few can afford to financially fail in a business enterprise. Whether we are starting a new business from scratch or just embarking on a new year, it is wise to look out from where we currently stand and create, as best we can, a vision of where we want to be and a plan for just how we intend to get there. In this five part series, I will review the basic components of the business plan we recommend for our clients.
Create a Financial Budget:
The successful business manager must be proficient at the most basic of economic principles – the allocation of scarce resources among competing uses. The appropriate distribution and utilization of the resources at hand is central to the planning process. Whether the resources to be allocated are natural, social, manufactured or economic, they must be correctly and efficiently put to use. The wise budgeting of any resource will maximize its usefulness. That truth however, is particularly important when it comes to money. For a great number of reasons it seems that money has a tendency to slip through our fingers easily and unexpectedly. No tool is more effective in resource management than a well developed and balanced financial budget.
With computer based bookkeeping so widely in use, the creation of an accurate and detailed budget has become significantly easier. A word of warning however, though it is easier it is not automatic. A few key strokes on the computer and you can print out the actual income and expenses for your business’s past year or several prior years. Input those numbers into a budget form manually or automatically and you have the starting point for a budget. This is where the wisdom and discernment of an experienced manager is tested. Line by the line the budget must be analyzed for waste, excess and deficiencies. Markets and trends must be considered and educated guesses called into play. How many calves will be sold? What will hay be worth? What will fuel cost? All of these questions deserve thoughtful consideration with the understanding that more important than having the number exactly correct is having a plan with all of the possible income and expenses considered.
The same old excuses or nagging doubts will try to distract you from the task at hand. How can I create a budget when I don’t know what the market will do? I don’t know what to budget for repairs because I don’t know what is going to break down. Don’t let these distractions prevent you from the completion of the budget. Having a budget drafted prior to the beginning of the year or production cycle will help you foresee financial challenges and obstacles and make necessary adjustments. Periodic review of a report that compares actual income and expenses to budgeted amounts will serve as mile markers measuring the successful implementation of your management plans.
A little bit of assistance followed up with some accountability will greatly increase the accuracy and usefulness of your budget. Get some help from your suppliers to anticipate price increases. Refer to your historic records to determine trends in production. Call on business partners and employees and refer to your operating plan to help anticipate unusual expenses. When completed, attach the budget to your operating plan and give a copy to your banker and or your shareholders. They’ll be impressed and pleasantly surprised.