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Ask Dave

Are Business Budgets Like Personal Budgets?

A listener asks on Twitter if you do the same budget for a business as you do for a household. Dave explains that a business budget doesn't have to be complicated.

QUESTION: A listener asks on Twitter if you do the same budget for a business as you do for a household. Dave explains that a business budget doesn’t have to be complicated.

ANSWER: It’s a little different, but it’s still the same concept. What you’re trying to do with a small business is project your income, project your expenses, thereby project your profit for this month, next month, and the next month. That’s a quarter. If you’ve been doing it a little while, you can reach out there and look at what you’re planning your year to look like. You ought to know that in June you might have a different revenue than you had in April for some reason or another. Maybe some event—maybe something—is happening.

I think the deal is that you still have to plan your income and your outgo, and that’s all a budget is. You’re driving by looking out the windshield. Sometimes in business—small business in particular—we (I’m a small-business guy myself) have a tendency to just live hand-to-mouth and crisis-to-crisis. We don’t do a lot of forward-thinking planning. Yeah, we look at the P&L (profit-and-loss statement), but that’s only driving with a rearview mirror. You can’t drive by looking out the back only—looking at the past only. You need to look forward too.

It’s really not rocket science, depending on the size of your small business. It can be fairly primitive. It doesn’t have to be a super-sophisticated idea, but you do need to look down and say, “Hey, I’ve got a lawn-cutting business. I’m going to cut this number of lawns. I charge this much, so my revenue this month will be total of X. We spend this on repairs on average. We spend this on new equipment on average. We spend this on gasoline on average. I spend this on payroll on average. Those are going to be my expenses for the month, and this is my revenue for the month. There’s my profit for the month.” If you’ve got a bakery shop, then you’ve got to buy the materials to do the baked goods, but you’ve also got to pay the rent. You’ve got to buy the insurance. You’ve got these bills that you know are there. Just begin to be intelligent about knowing where they are and where the money’s going.

I can tell you that it’s one of the top reasons that small businesses fail. They don’t do a good job of handling their money—of making the money behave and projecting revenue, projecting expenses and those kinds of things. Then they turn around and blame cash flow problems. “Cash flow problems” is a generic term. What does that mean? That means you borrowed money, and you’ve got too big a freaking payment. What does “cash flow problems” mean? It means you didn’t have enough money coming in, or you had too much money going out. These are predictable events. You certainly wouldn’t plan to have “cash flow problems,” would you?

You’ve got to project into the future and think about what it is you’re going to do, and that’s all a budget is. You’re saying, “This is what we should make this month. This is what we should spend this month realistically.” It’s not even a goal. I try to tell our folks around here when they’re doing budgets, that’s not goal-setting. This is realistically you having a conversation with the marketplace. You look at the marketplace and say, “Mr. Marketplace, Mrs. Marketplace, Joe and Suzy, I think I can sell you so many widgets. Out of those widgets, I think that my cost of goods sold on a widget will be X, so my gross profit will be Y minus my overhead will be my real net profit of Z.” You break it down like that.