This is an excerpt from a presentation I give to business owners about managing cash flow and working effectively with banks.
Let’s talk now about effective budgeting. I think there are 2 things to know about budgeting:
- Creating a budget is not hard
- Creating a budget that is actually useful IS hard
Some do’s and don’ts:
- DON’T just take last year’s totals and increase everything by a set percentage.
- If you’re doing a monthly budget (which I recommend), DON’T just take the yearly total and divide by 12 to get the amounts for each month.
- Good budgeting requires a time commitment, so DO find time to create the budget and keep it updated.
A common question is whether a budget should be monthly, yearly, or both. In my experience, monthly budgets are the most useful.
When creating a monthly budget, you really need to think about the actual revenue and expenses you think you’ll have for that month. A common mistake is, taking the projected yearly amounts and dividing by 12, and plugging that result into each month. That might work for some things such as utility expenses, but it’s not useful for most other line items.
For example, if you know you’re going to spend approximately $2,400 in July on a new computer, then you should put $2,400 into computer expenses for July, rather than $200 a month into that category each month.
How Often Should You Update Your Budget?
There seem to be 2 thoughts on this in the industry.
- Some people say a budget should NOT be revised during the year; the budget is a management tool and once it’s set you leave it as-is all year. At the end of the year, you examine the budget to see whether you met your targets.
- Some people say you should update the budget periodically (quarterly, for example) as situations change and new information becomes available.
I think the answer is “it depends.” It depends on the types of changes that are happening during the year.
For example, if you were anticipating a large contract to bring in revenue in June, and that contract got delayed til August, I would say leaving the budget as-is because that revenue is coming in the same year, just a different month.
In the third and final part, we’ll cover how to work effectively with banks.