What is a budget?
August 24, 2020
This assistance could have been a commercial loan from a bank, a loan from a private investor, or an investment directly into your business by someone. Most likely, before you were given the loan or investment, you were requested to provide a business plan. In your business plan, you probably provided some cash flow projections and other financial projections.
In essence, you were creating your budget for the next year. You were telling your lender or investor that this is what you expect your revenues and expenses to be in a given month during the next year.
On what did you base those numbers? Wild ideas? Educated guesses? Hopefully, you based them on your knowledge of your business and its related industry. And, you took into account any affects seasonality may have on your business. (That sounds a lot like a budget.)
Consequently, a lender or investor believed in you and your plan, or they would not have financed your venture. So, what is a budget?
Webster’s dictionary offer’s this as one definition, “a statement of the financial position of an administration for a definite period of time based on estimates of expenditures during the period and proposals for financing them.” Where Webster says “administration,” substitute the word “business.” From this definition, we see that a budget is more than just a moving target we hope to hit. It is a financial plan.
The former president and CEO of a local company would chide store managers and district managers when budgeted sales were not met or for exceeding budgeted expenses. He was well known for saying that a budget was not a target, but that it was a financial document that served as a statement to lenders and investors that the company would perform at this level. When the company didn’t meet the budget, it was letting lenders and investors down.
As a financial document, the budget is also a yardstick that measures performance. On a month by month basis, you can compare your revenues and expenses to your budget. Are you meeting the budget? Are you exceeding budget in revenues, and below budget in expenses? If so, there’s a good chance you are profitable.
You should be reviewing, revising, and rewriting your budget on an annual basis. At the same time, review, revise, and rewrite your business plan to reflect your current business model. The business that routinely creates and sticks to a budget has a good chance at success. And, when it comes time to expand the business, it can present this financial document to a lender in an application package and feel confident in a greater likelihood that the lender will support the application.
For assistance in creating or working with your business budget, contact one of the advisors at the ASU Small Business Development Center.
“Business Tips” was written by James Leavelle, Senior Certified Business Advisor of Angelo State University’s Small Business Development Center. For more information on the topic of this article or the services of the ASU · SBDC, contact him at James.Leavelle@angelo.edu.