- Rachel Allen
- 28th Oct 2020
Why my budget is my most important business tool
I remember my first major wobble when I first started my manufacturing business.
It was all centred around the forecast/budget that we had put together. There were so many unknowns.
I asked my business partner to reassure me.
But he couldn’t!
We can’t, any of us, predict the future with any certainty. All he could do was tell me that this was the best estimation of what we thought would happen based upon past experience (he had more than me) and what customers had told us. To a degree, we would have to just hope.
But this begs the question, why forecast/budget at all? Why spend all that effort putting together all of the knowns with all the unknowns? Surely it’s a waste of time?
Well, actually. It isn’t.
While we didn’t know what would happen, we had put together a forecast based upon our best estimates. And then, most importantly, we measured our estimates against what actually happened.
This meant that we could quickly see when something was going differently to our original expectations and adjust accordingly. Such as when one customer doubled their buying from us and another customer didn’t come close to the sales they had told us they would put our way.
By putting our stake in the ground, metaphorically speaking, as to how things would go, we could easily measure to see whether or not we were correct.
Now, 16 years on, there is still a large element of guess work in our budgets (don’t tell the bank manager). They are based on a lot of experience (16 more years of it) but there are still many unknowns (want to predict how COVID will go anyone?)
But still, we measure our best guesses against actual and take action accordingly. We’re not always right and sometimes we do better and sometimes worse than we thought. But the practise of budgeting and measuring means that we have a good focus on what’s happening and what we want to be happening and we can take action to make the two align.
I would honestly go so far as to say my forecast is my most important financial tool (other than the accounting software itself I guess). It keeps us focused on what we can influence, when there is a sea of unknowns out there.
It also keeps me on top of my accounts. I can’t update the forecast without actual data to keep is as accurate and up to date as possible. I know that if I ever let my accounts drop by a month or two it leaves me very much on edge. Like I am driving full pelt in the dark with no lights on.
Actually driving in the dark is a great analogy for budgeting. Given the number of unknowns it is like driving in the dark with the lights on. We can see a little way in front. We can be fairly accurate predictors of what our business will do in the next day, week or maybe even month depending on how far ahead you can see (we can see quite clearly a month or so into the future due to having orders on from customers for up to two or three months out).
But we cannot see exactly. We can’t see a supplier being unable to supply at the last minute, or a customer cancelling an order, or the world shutting down for a global pandemic. We can see some of the road ahead (that bit illuminated by the lights in our analogy) and we can see (if the accounts are up to date) the road we have travelled. And this means we can keep moving forward, towards our goal.
Taking the driving in the dark analogy further, when we are feeling safe and confident we can actually travel quite fast, even though we can only clearly see a short way ahead of us. And we can be relatively confident of arriving where we want to go. We just need to be very aware of what is going on so that we can avoid unexpected obstacles or get going again if we come across an unexpected bump in the road.
Now your business and mine will be very different. We are driving different roads in different cars with different strengths of light. But, our budgets/forecasts can do the same job for both of us. Keep us focused on what we can influence, highlight when we are drifting off the road we want, and, hopefully, highlight obstacles before we hit into them too hard and cause damage.
Budgets don’t need to be complicated. They can be as complex or simple as you like. Admittedly the more variables you have in your business the more complicated it is likely to be (my manufacturing budget is quite an impressive spreadsheet if I say so myself). But, you can keep it as simple as you like or need and still get great benefit from it. My coaching budget is just one page long – I list out my monthly expenses and breakdown what I would like to sell in the month. I then compare that with what I actually do.
If you would like to find out more about how to create your own budget or forecast, join me on one of my Business Budgets Made Simple workshops. These are interactive workshops where I will teach you how to create, use and love budgets in your business and we will make a start on creating you budget there and then (well, I did say it was interactive!)
Or you can book a confession session. These are perfect for us to go through budgeting and get you started on one on a 1-2-1 basis.
I hope that these have been helpful. If you would like to know more about the above or VAT in general then don’t hesitate to get in touch at www.facebook.com/rachelallencoaching or firstname.lastname@example.org