‘Why should start-ups care about the budget?’ – Top 3 budget myths debunked

Time to bust some myths around budgets for business with @StanChart Click To Tweet

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.

Why should you budget for your business?

Ever wondered how multinational organisations control their financial calendars? It's simple Click To Tweet

“I was always running out of money, constantly struggling and missing my orders was the order of the day. Having my lights turned off, sometimes in the middle of a client presentation was not surprising anymore; all this because I had either forgotten to pay the bills or I had no money to pay, the devil is a liar”. Rosanne told us.

In small businesses, these kinds of confessions abound, and most of the time, they are blamed on external forces or things beyond our control. Have you ever stopped to wonder how a big organisation, with thousands of branches across the world, hundreds of suppliers and millions of customers can control their financial calendars, knowing exactly whom, why and when to pay?

The answer is; they meticulously prepare and monitor budgets, which helps them figure out these details. Since budgets have served big organisations well, we have misconstrued them to be a tool for big organisations. Yet, by the very nature of small businesses, the scarcity of funds, the reliance on the founder, and the advantages of a budget means that these small organisations need them most. Yet we find that most micro businesses don’t maintain budgets and struggle through financial management like dream walkers.

If you have experienced any of the symptoms below, either in your personal or business life, then you are suffering from a disease called lack of a budget and you should immediately take the steps provided below to return you’re to good health.

Symptoms of lack of a budget

  1. Run out of money unexpectedly
  2. Unable to pay for emergencies such as medical
  3. Unsure whether you can afford good business opportunities
  4. Have too much money lying around
  5. Losing suppliers due to your inability to pay them
  6. Unsure whether things are going well in your business, you have no idea where you stand
  7. Receiving reminders and chasers for payment from tax authorities, suppliers etc.
  8. Unable to identify business decisions such as when to increase your prices or hire more staff.
  9. Not knowing when to talk to your bankers about loans, investments or deposits.

To remedy these symptoms, you need to start preparing budgets, it is as simple as ABC. In upcoming articles, we will be teaching you in length.

  • The phases or stages that you should go through while working on the budget for your business.
  • How a budget influences important business decisions.
  • Debunk the myths around budgeting in the article and guide you towards changing the mindset on why we must budget.

Simply put, a budget is a plan on how to earn and spend money. Maintaining a budget, updating and monitoring it often will help you avoid all of the above financial pitfalls that can harm your business.

Stick around and reading all articles in the series -as well as any other on budgets- to enable you to master the budgeting process. Remember, failing to plan, is planning to fail.