The benefit of budgets
How do you get from where you are at to where you want to be?
First off, you find out where you are at. You can’t get to Capetown unless you know that you’re starting from Poffadder.
Then you choose your route. If it’s complicated, you’ll write it down, or have Google Maps or Waze spell it out for you.
Then you start out on the journey. Do you check occasionally to ensure that you’re still on track? I think that would be a good idea, don’t you?
What happens if you take a wrong turn? Well, if you’re using a nav app, it will recognise that you’re off course and recalculate the route to ensure that you still reach your destination.
That’s how budgets work for you in business. You use the previous year to establish where you are at. You decide where you want to be (financially) in a year’s time and you then map out how you will get there. This is all done in Excel and your accountant (in house or external) can build the model, but with your practical input.
You start out on the year’s journey and each month you check whether you’re where you planned to be. If you’re off course, you then take corrective action to get you back on track.
There are two important aspects to this budgetting approach –
1) Preparing a budget forces you to think about things that you might otherwise not apply your mind to, like “How am I going to increase turnover?”, “How am I going to handle the extra business without ballooning our salaries bill?” and
2) a budget gives you a measure against which to compare actual performance so that when you go off course, you know that you’re off course!