Conventional wisdom: Just starting up? You've gotta spend money (then spend more and more money) to make money!
On the contrary: That budget's more important than you think. As un-sexy as it sounds, it pays to be cautious sometimes.
Spending money is fun. Budgeting is not. It's constraining, it's boring, and it can make you feel like you're not running your company--your company is running you.
But things can get dicey if you completely ignore your budget. Let's say you're having a typically great year, growing above expectations and everything's hunky-dory. So, as usual, you spend like your revenue is always going to continue at the same rate (or even better).
And then there's a hiccup--say, the 2008 recession--and the cash flow slows. That's when leverage can shift to your lenders or investors, and eventually you end up with you working for them, not for yourself. If you've ever met an entrepreneur who only owns 4% of their business, this is probably how it happened. Nobody wants that.
Size doesn't matter
Whether you're just starting out or made billions last year, budgets are equally important. When you're small, you don't have any sort of a cushion for mistakes--and no banks or investors are going to bail you out or give you a loan if you run into trouble.
When you're big, small mistakes can have huge consequences. It's like when kids play crack the whip on the playground: by the time a slight turn reaches the person at the end, it's multiplied into a massive movement and that person gets thrown off the chain.
Little mistakes in a big business are the same way. A ripple somewhere in the company can turn into a seven- or eight-figure problem before you know it. The good thing about being big is that you'll probably be able to find a bank or investor to help you out--but you might end up having to sacrifice a chunk of your company to survive.
When we first started out, creating a budget was something we did to placate our finance department; outside of that, we didn't pay it much attention. When a company is growing by 30 to 40 percent every year, it can feel like a budget you create in October is going to be toast by the middle of February.
However, when bankers or investors start imposing covenants that can control your spending, or if you realize that revenues are growing at 40 percent but expenses are growing at 50 percent, you realize that a budget is a necessary evil. Think of a budget as a guide for where you want your business to go, and how you're going to get there (with your payroll intact).
It's a budget, not a gospel
All that being said, budgets can't be so rigid that you forego opportunities. As long as you don't have outside investors with a stranglehold on your money, you can afford to take advantage of investments that will turn into profit in the future.
Be conscious of your budget year-round, not just every October. We've started having monthly State of the Budget meetings to evaluate how we're sticking to our revenue and expense goals and make gentle course corrections if necessary. Having that sort of flexibility is vital for any business's survival.
One final point: don't let your accountants be the only people in your organization who control how you spend your money. Get involved and stay involved. Accountants know money, but you know your business, and you've got to have both to succeed.
In my experience, the only people who know less about how to run a successful business than accountants are lawyers. Don't let either of them control your company and you'll be headed in the right direction. Respect your budget and you'll be in an even better position to weather whatever hiccups come your way.