Here at SLA, budgeting is not a new concept. I am sure by now we know why we need to set up a personal budget and how to go about it. However, how many of you #MotherlandMoguls spend time budgeting for your businesses? Did you know that there is a difference between the budget and other financial accounts?
During Standard Chartered Bank’s Financial Education workshops we have had small business owners give several ideas about budgeting, most of them are misconceptions that we need to debunk. Have you found yourself making one of these statements about your business budget?
“As long as I have prepared the financial accounts I don’t need a budget.”
“Only big businesses need to do them.”
“They always turn out differently.”
Read through as we debunk each of these common misconceptions
1. “As long as I have prepared the financial accounts I don’t need a budget.”
Here we need to understand that the financial accounts for your business are very different from the budget. Whereas the financial accounts look backward, the budget looks forward. The two do not play the same role for your business.
The budget is a financial plan for the forthcoming period while the accounts are a report for a period that has passed. In our view, the budget is more important as it is a predictor or a guiding light for your business.
2. “Only big businesses need to do them.”
It might look like only big businesses need to draw up a budget because they handle such huge amounts of money or because they have much more to lose BUT the reason why you need to draw up a personal budget is the same reason why your business needs a budget.
It is actually much more important for a start-up to begin the habit of budgeting so that as the business grows the process becomes easier. Start-ups and small businesses are more likely to go bankrupt in the early years and a budget is one of the important tools that can save your business.
3. “They always turn out differently.”
Surprise! Surprise! Budgeting for your start-up is a tricky business; things do not always turn out the way you write them down. Your sales estimates are not always right; your expenses hit the roof sometimes. We have some good news for you though, this is absolutely normal!
Your business’ budget does not have to be 100% accurate. You should review your budget ever so often to adjust and check on the variances as you get more information. Yes, budgets always turn out differently because they look to the future and we are never 100% sure what will happen in that future; and it acts as a blueprint to ensure your businesses is not groping around in the darkness.
As important as it is, a budget works hand in hand with the accounts to help you measure the performance of your business, period after period. It is great to have both documents, and if you need the help of an accountant, by all means, go for it.