- Budgeting is an example of the old phrase “Plan your work and then work your plan.” Budgets aren’t handcuffs. Budgets aren’t straitjackets. Budgets are simply planning tools that you use to thoughtfully make decisions about your firm’s financial affairs for the coming year.
- If you aren’t getting value from the budgeting process, you shouldn’t do it. Or, at the very least, you should change the way you’re doing it. No kidding — don’t budget if you don’t get value from the process. But, most businesses do get value. If you can manage your business without a budget — don’t budget. You use those tools that deliver the most value to you in managing your firm. For many people, budgeting does just that. If it doesn’t for you, skip the work. Time is often the scarcest resource for business owners and managers.
- Budgets can be essential tools for managing people with financially quantifiable responsibilities. Budgets have a bad rap, and they aren’t perfect, but you know what? If you have people working for you who have responsibilities that you can financially quantify, you can use a budget to manage those people.
Suppose that you have salespeople who should individually sell $25,000 worth of stuff each month. If you budget by salesperson (you probably need to set up a class for each salesperson or a revenue account for each salesperson), you can use a budget to compare actual sales generated by each person with the budgeted sales expected for him.
If you look at Joe every month and see that he has $30,000 in sales predictably, you can use that information in your management of Joe. Probably, Joe’s overproducing means that he’s doing a good job. If you look at Joe’s brother Bob and see that he’s doing $20,000 in sales every month when you expect him to do $25,000 in sales, you can probably see a problem and an opportunity for improvement. All this makes sense, right?
- People who like to budget tend to focus on unfavorable variances. Although unfavorable variances often identify problems that need to be corrected, favorable variances sometimes are more interesting and more useful to dissect.
Suppose that you have a business in which you expect salespeople to generate $25,000 in sales a month. If Julia is generating $75,000 a month in sales, that’s pretty darn interesting. Julia probably knows something or has skills or an approach that the other salespeople don’t have. Perhaps, with just a little bit of luck, you can figure out why Julia does so well — and then use this new knowledge to get your other salespeople to sell more stuff each month.
- The key budgeting numbers to watch are often a pretty small set. Although a budget according to QuickBooks may have hundreds of numbers, you may be able to manage your business just fine by looking at just a handful of numbers. Maybe in your business, everything comes down to sales. If sales really drive everything else — your expenses and, of course, all your profits — you may not have much reason to track the amount that you’re spending each month on your telephone bill or postage expense.
If you can distill your financial plan down to a few numbers that you need to watch, you can make your budgeting and financial analyses much simpler. All you do is identify the key financial statistics to watch — and then watch them regularly.
Financial ratios are often very useful tools for monitoring a firm’s financial performance. Many business owners successfully manage their businesses without a formal budget by looking at two or three items, including cost of goods sold and gross margin percentages. The cost of goods sold includes the cost of the products or items being sold. A gross margin percentage is the percentage of sales left over after paying for the cost of goods sold.
