I love the concept of scenario planning. At the same time I hate the idea of budgeting. I just find budgeting drudgery that I do on an annual basis. Sometimes my budget is accurate, but more often than not my budget ends up having little in common with what my actual year ends up being.
Have you ever found this to be true with you? You’ve spent a lot of time coming up with a budget and as the year goes on your budget looks more and more like fiction. After a while you might just say to yourself, “why do I bother with this in the first place?”
As much as I would like to agree with that sentiment, I can’t. I’ve found that budgeting is useful for some very specific reasons. Among them are:
When you have a budget, you monitor how others are spending your money. I’ve often found personal budgeting feels like a punishment. It’s my money and I already have different buckets my money flows into. Why do I need to budget and keep track of money that I’m spending on myself?
When it comes to your business, it’s a completely different thing. You want to know how others are going to spend the money your business brings in through sales. Like everything else that exists in a private business, the amount of resources your business has is limited. You and your people have limited energy have for projects and it’s true for how much money your business can spend.
A budget is the first step in scenario planning. Many people will do three scenarios when they put together a budget. Although I don’t recommend this, having a best case, probable case, and worst case budget is not a horrible thing to do. It can even be positive if you do this and really pay attention to what the scenarios mean.
I recommend that instead of doing a best, worst, and probable case budget you do one budget that you use for what you think will happen. Next, you want to think about what specific things could happen during the coming year. These are the actual scenarios you might want to build an alternate budget around. You will especially want to do this if any of those things could cost a great deal for investment or one involving a serious decline in your business.
A budget is the final step in a strategic plan. Budgeting is both a tactical and strategic activity. You are being tactical when you budget and the question is what does my year look like? You are being strategic when your budget ties into what you think is going to happen and is the result of activities you’re going to pursue during the coming year.
Budgeting can be simple. You don’t need to make your budget be a long and involved process. You can simplify your budget by starting with what happened last year. As you go through last year’s line items you can ask yourself, “is this number going to change over the next year?” If the answer is yes you will want to know why. If the answer is no you will want to ask, “why not?”
In my experience no matter how I look at budgeting it’s a boring activity. At the same time it’s a discipline that I believe all business owners should adopt. It’s the first step in thinking about good and bad things that can happen in your business. Even if your first budget is wildly inaccurate, you have gone through the process. The second time around you’ll get a little better. I find that budgeting, like any activity, gets better the more we do if we learn from the mistakes we make along the way. But, mistakes are a different topic for a different day.
We have a special report that covers what I call four tiered budgeting. This system of strategic thinking starts with what your sales will look like next year, what sort of people needs will you have to produce those sales, what capital investment will you have to make to support the sales and finally, producing a budget that shows what the result of your assumptions is. To get this special report, click on the button below.