09/ 26/ 2007
by Nancy Mann Jackson
How to build and follow a budget
For many creative entrepreneurial types, building and following a budget is anything but natural. But conducting business without a budget is like taking a trip without a map--getting lost (or losing money) is almost guaranteed.
Budgeting is all about planning, says Marc Dollinger, professor of business administration at Indiana University's Kelley School of Business. A strong budget allows you to plan for spending, clearly see profits and be prepared in case of emergencies.
"Don't think of a budget as a constraint but rather as a control to avoid waste and ensure profits," says David Ramp, business counselor at the University of Alabama at Birmingham's Small Business Development Center. "While you don't want to come up short, you also don't want to miss out on increasing profits because you failed to adequately control expenses."
Your budget should include any expense related to the operation of the business as well as any expected income. Experts recommend utilizing a number of different budgets for the different activities of your business, including start-up, sales, operating, labor and marketing.
"These can be aggregated into an overall budget, but keeping them separate gives the entrepreneur better information," Dollinger says.
The best budgets are created using previous historical accounting data, which is realistically adjusted for the future. And like any good plan, a strong budget can lead to success if it's followed correctly. The task of adhering to your budget should be:
Regular. "Make budget review a regular part of your business operation; make it a habit," Ramp says. The key is to "have a process that provides timely feedback so you know how you are doing," Dollinger adds.
Accurate. "Treat your budget like your checkbook," Ramp says. "It's a matter of money in and money out. You want to be certain that you have made money, and that it has cost you what you expected to operate your business."
Fun. When you meet budget goals, "reward yourself and those in the organization who are responsible for hitting the targets," Dollinger says. "There should be small bonuses, a party for the individuals who did well and recognition for the entire organization. If you reinforce behavior with positive outcomes, people will want to repeat the experience."
Flexible. "No budget should be written in stone," Ramp says. "Budgets are plans based on best available data to assist with controlling costs and allocating resources. Once deviations are detected, action should be taken to reflect actual circumstances. Reality can be one of the best budget killers."
NFIB.com
Learn more about preparing and sticking to a budget in the "Finance, Banking and Accounting" section of www.NFIB.com/toolsandtips.
