When I reached a certain point in my career where my success had given me some resources to work with, my dad gave me a great piece of advice. He told me, "You can now do anything you want to. But, you can't do everything you want." This sage advice meant I had to make some choices about how I would spend my time and money.
This was not only great advice for me personally, it's also great advice for anyone running a business. It helps explain why you need to have a budget for your business.
Now I understand that some of you might literally shudder at hearing that term. But the kind of budget I'm referring to doesn't have to look anything like you might find in a large multi-national company with thousands of line items. It also doesn't involve getting everyone inside the company to spend three months building either. If your financial team is bringing you down a process like that - stop now!
I'm talking about even just a simple budget that might have ten or twenty lines accounting for the main factors contributing to revenue, product costs, overhead, and profit. This might not be enough for the accountants, but it will get the job done when it comes to helping your business make the best possible decisions.
I also understand that entrepreneurs running startups don't typically need budgets because things are still so simple that you can do the math in your head. As you begin to grow your business--and especially when you begin to add a management team--your budget becomes the control center that keeps everyone in alignment toward reaching your goals. Your budget becomes a measuring stick for understanding where you stand at any one time-- are you ahead or behind -- relative to where you want to end the year.
A budget is also something that helps you make decisions during the year while also helping avoid any surprises at the end of the year. This is especially important if you have any lenders like a bank you might be accountable to or even investors who might have specific targets they expect you to hit. If you aren't monitoring your progress via a budget throughout the year toward fulfilling those promises, you might be setting yourself up to having to answer lots of unpleasant questions at the end of the year.
Having a budget can also help you understand the value of making certain investments throughout the year.
I was recently working with a management team, for example, who was exploring whether it was time for them to hire on several more senior people. But they knew that by hiring them, it would be an expense that would significantly impact their bottom line.
In the past, they had made these decisions on the fly because they didn't have a budget. So, by the end of the year, they were often surprised at how profitable they were--or weren't.
This time, though, they consulted their budget and realized they could make some cuts in other areas to make room to bring on the new people and still hit their budgeted goals for the year.
That's why this all ties back to that pearl of wisdom my dad shared with me. A budget is a great tool for helping you understand that while you can do anything with your business, you can't do everything. A budget can help you decide on what the best choice might be for you to make when it comes to the cash you have available, your strategic objectives, and the profits you want to attain.