Is it Worth Doing a Budget?

11 June 2024

OK, it’s nearing the end of the financial year and you, a small business owner, are wondering what the next financial year will bring.

Here’s your challenge. Do you ‘let it happen’ or do you ‘make it happen’?

The world is complex and difficult and small business owners can feel they are powerless to make much difference to the outcomes from their business. There can be pressures from customers, competitors, technology, government regulation and so forth that a business owner can consider and conclude there is nothing that can be done about it. This is the ‘let it happen’ viewpoint.

Without looking at the world with rose coloured glasses, the other viewpoint is to ‘make it happen’, or at least ‘try to make it happen’. That is, you take control, as much as possible within your circumstances and, by good strategy and hard work, you influence the outcome towards what you want.

The motivation behind building a good budget is to employ the ‘make it happen’ philosophy. If you want to ‘make it happen’ creating a budget built on your strategy will enhance your ability to achieve your goals.

Good servant but bad master

While budgets can be an excellent way to help you run a business, the budget cannot become your master which you blindly adhere to at all costs. The world is changing too fast for you to be absolutely fixated on achieving a particular set of numbers in a particular way. Being inflexibly attached to your budget can result in adverse outcomes. Budgets are a means to an end; not and end in themselves.

Budgets are often set for a 12 month period. Some suggest that having a budget that looks out that far will create inflexibility. Also, the 12 month period can result in putting things on the ‘back-burner’ because ‘I’ve got 12 months to get that done’. Others have suggested that a series of short-term budgets/goal setting can be more useful for an organisation.

For example, you might set your budget every three months. The budget requires you and your team to achieve a specific set of outcomes. Three months is not a long period, so the temptation to put off actions can be removed by the urgency with which you need to engage in the actions you set for yourself.

Paradoxically, setting a budget for a shorter period of time can, in the end, mean you spend less time on the process. Preparing a 12 month budget might take quite a bit of effort, but a budget for a shorter period may focus your attention more and you finish up spending less time on doing the budget and more time working on it.

However, the key is to choose a time period for your budgets that works best for you. You might employ a mix of broad predictions for longer periods and far more detailed predictions for shorter periods.

Other benefits

A very useful part of the budgeting process is to predict what resources you need to achieve your goals. Will you need to borrow more money or have more invested capital? What new employees or service providers will you need? How will you acquire those people? Do you need new equipment and what will be the process for acquiring these new acquisitions?

One of the great benefits of setting a budget is so that you can examine why the actual performance of your business met with, exceeded or fell below expectations. Examining why predicted items did or did not align with your expectations can give you valuable information about what to do in the future.

Of course, there may be other factors that impact on the way you go about budgeting. These can include information for financiers and planning for larger acquisitions of assets. Also, it’s always good to have a clear idea of when, and how much, tax you are going to pay.