Finance

The Bottom Line

Why it's important to have a budget
3 min read
Opinions expressed by Entrepreneur contributors are their own.

Business Start-Ups magazine, January 1998

Now a word about your budget. Don't have one, you say? You are not alone. "Too many small-business owners operate without a budget, and therefore have no idea how well--or how poorly--their businesses are doing," says Cathryn L. Taylor, senior manager at Deloitte & Touche LLP, Chicago.

Case in point: Taylor's husband has been running a consulting business for seven years without a budget. "He feels he can't hire employees or plan other moves because he never knows how many hours he will be billing from month to month," Taylor says. "But with a budget, you can plan ahead, establish goals and, more important, measure your performance. How can you know how well your business is doing unless you have something to measure it against?"

Many small-business owners dread the perceived complexity and the drudgery of budgeting. In reality, however, creating a budget need not be a complicated or time-consuming task, particularly for a new business owner. In fact, Taylor advises keeping it simple in the beginning. "Don't get caught up in details that might discourage you from maintaining monthly financial reports," she says. "Instead, prepare a simple budget and develop the discipline of budgeting."

Where to start? Take two sheets of paper. Label one "Income" and the other "Expenses." On the first, list major revenue-producing categories and estimate minimum monthly amounts for each item for the next 12 months. Then do the same for "Expenses," listing primary outgoing items and estimating maximum monthly expenses for each.

"For the first year or two, keep the categories fairly broad," suggests Taylor. "Rather than 85 lines of detail, focus on key items that are driving revenues and expenses. If you sell women's clothing, for example, revenues might include four or five broad categories, distinguished by designer or manufacturer. Then categorize your expenses by store occupancy costs, production costs and labor."

Remember, a budget is a management tool that can help you control your expenses and measure your company's performance, but it's only a guideline. If your actual expenses exceed your budget, you have an opportunity to make up the difference by increasing sales or reducing other expenses.

The bottom line, according to Taylor, is this: "Business owners really need to prepare a budget because if they can't talk those numbers, they can't execute the performance."

Contact Source

Deloitte & Touche LLP, 180 N. Stetson Ave., Chicago, IL 60601, (312) 946-2084

Paul DeCeglie is a former staff reporter for Journal of Commerce and American Banker. He can be reached at MrWritePDC@aol.com

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