According to Miriam-Webster:
Budget: 1) an amount of money available for spending that is based on a plan for how it will be spent (“How much did you budget for your new kitchen?”); 2) A plan used to decide the amount of money that can be spend and how it will be spent (“We have $x,xxx in our marketing budget this year. How much should we budget for internet? Direct mail? Other?”)
While the word “budget” and the action of “budgeting” is supposed to produce more good than harm, many people look at it as a bad word, a word and a process that is going to make an individual cut out all of the fun in their life. On the contrary, budgeting can be a way to enjoy your life even more, just maybe not this moment.
With the new year upon us, whether you are a business or a family, you should consider creating a budget (if you haven’t already). This week I will focus on the business budget for any business owners reading this with the family budget to follow next week. There are 2 different ways that you can generate a budget – start with income and adjust expenses to “fit” or start with expenses to determine how much needs to be earned. For a personal, family budget, I would suggest starting with the income since that is what it is (generally speaking). Since this post is focused on the budget of a business, I would suggest the other method since the majority of expenses are known going into the year, again, generally speaking – you know what your monthly rent is going to be; you have your staff in place so you know what their salary and benefits will be; insurance policies are most likely in place. If you are a retailer, you (should) know what your markup is so you can figure that into your budgeted expenses. Tackling a budget using this method will then let you know how much revenue you need to earn. If the required revenue amount seems way too high, you have certain options – 1) cutting certain expenses, 2) pushing higher margin products, 3) offering promotions to drive traffic, or 4) actually increasing expenses to boost your marketing efforts to bring in more customers/clients. Each one will alter your “original” budgeted expenses but should create an outcome of more revenue than additional expense.
On the flip side, if you anticipate having a much better year than your projected expenses require, you now have to plan on what to do with the “extra” money. Do you take a raise? Give your employees raises? Upgrade your infrastructure? Aggressively market yourself to grow even more the next year? or sock it away for a rainy day or to invest in another business should the opportunity arise? All GREAT problems to have but all need to start with a budget.