3 things to consider as you plan your budget
We had to get a new car this month. I hate dealing with cars and the car buying experience. Meanwhile, my husband loves cars. He reads about them, watches shows about them, and knows which are considered safest or have the lowest maintenance costs. He dreams of the times we need to get a new car, while it creates an excessive amount of stress for me.
As our 2011 Outback started telling us it was time to leave our family, we proactively prepared to move when needed. Prior to any shopping, we agreed on a dollar amount to spend based on what would fit into the monthly budget. We determined how much to take out of savings for the car. We ran the numbers for our specific situation. We looked at all the variables that go into owning a car beyond car payment. We figured out what increase in insurance and maintenance we could afford. Once we understood the impact of the variables on our budget, we started the laborious task of finding a car.
The benefit of completing the budget planning process prior to shopping for cars was that it created guardrails to work within. Filtering our searches became easier. Having a budget removed some of the emotion of the car buying experience. Unfortunately, no amount of budget planning removes the headaches associated with the dealership experience, but that is an article for another day.
The budget planning process has many of the same benefits for business as it does for car buying. As business owners, it is imperative to understand how changes to your spend impact the bottom line. Unfortunately, many small business owners do not create a budget and lack clarity on how much they can shift their financial resources during the year.
For a small business owner, a budget does not need to be complex. It needs to be a simple tool that lays out what you anticipate spending each month or quarter on the different line items of your P&L. You can build it based on the current year’s financials and changes you expect to happen, such as adding team members or a new software implementation. It does not need to be perfect. You are not being graded on how close you get each month. It simply needs to provide you guidance and insights for decision making.
As you start planning for the new year, a budget planning tool can provide you the freedom to grow your business without questioning affordability. I have pulled together three things to consider in budget planning so you can feel more confident about how you are running your business next year.
The real power of a budget is when it allows you to do real time planning and what-if scenarios. Having a mechanism, or formulas, which show the impact of changing key values or variables can create confidence in the decisions you need to make. Once we started looking at cars, we were able to put the anticipated costs into our budget model and fully appreciate which cars were going to increase our spend the most. For your business, seeing how the expense structures change when you add new employees or move into a new office space will allow you to make more informed decisions.
As you build your budget, create a tool that provides you flexibility and is not too broad. If there are line items that have more variability or co-dependencies, separate those out. For the car buying experience, insurance is not a static number. It will fluctuate depending on the age and safety features of the selected car. In a business, employee compensation is incredibly dynamic. Create a separate section of your budget that lists out each employee and their specific compensation expenses, such as wages, benefits, 401(k) match, employer taxes, etc. Having visibility into how significant each specific area of employee costs is or what a simple raise for an employee will do can help you control your margins.
A budget planning tool allows you to monitor progress throughout the year. Budgets should not be set-it-and-forget-it. They should be a dynamic resource to support you in making decisions when you need to. We know that as we use the car, we will have a better sense for the maintenance costs and in six months, insurance premiums will change so we will update our budget when that happens. As the business changes throughout the year, you will want to review where you stand and understand how changes you have made impact the coming months. Using the budget planning tool for monitoring and reviewing actual numbers compared to projected ensures you are not trying to stick to a budget that is no longer relevant.
Small business owners run dynamic businesses. Things happen in business, just as they do with cars. The unexpected is commonplace. Having spent time prior to desperately needing a car planning the budget allowed us to move quickly and confidently when the need arose. A budget planning tool for your business provides the same benefit, ensuring you can move forward quickly and confidently when opportunities present themselves.