The Dreaded Budget: Arbitrary Constraint or Useful Tool?

Try to think of something more corporate than a budget. Does the thought of the budgetary process give you anxiety? If yes, you’re probably an owner-entrepreneur.

Budgets are definitive statements about the future. They put your business in a box. You do not like being put into a box. You are an outside of the box kind of person.

In spite of this, I assert that you should embrace the budgetary process. Yes, it can be tedious and time-consuming. But the reward is great for those who treat the budget as more than a mandatory annual exercise for their lender.

The Bad Side of Budgets

One common complaint about budgets is that they encourage the “use it or lose it” mentality, which leads to unnecessary expenditures to preserve one’s budget size for next year. While I have seen this behavior in large corporations, it is far less common in closely held businesses with engaged ownership.

Another complaint I’ve heard is that budgets form an artificial constraint. Once again, I find this to be more myth than reality in closely held businesses. Certainly the budget can constrain spending and force the team to do more with less. But it also can enable collaborative conversation when unforeseen needs arise, leading to better outcomes.

The Good Side of Budgets

I cannot recall the source, but it was once said, “The problem with forecasts is that they’re about the future.” This is true. You will either beat or miss budget, never nail it. That said, the best thing about a budget is that it provides a measuring stick, which can serve an invaluable role in helping you improve your business.

You might focus on up-time, production rates, truckloads, clicks, foot traffic, conversions, scrap rates, or whatever statistics matter for your industry. Yet when it’s all said and done, profit or loss is the measurement that determines business success or failure. So why not monitor progress toward that goal?

By setting an annual budget and measuring actual progress to it monthly, you will discover a lot about where you need to be focusing your efforts. Additionally, this process will make your company more bankable and invest-able, as you are able to discuss and address variances (positive and negative) to your budget in record time.

Need help with your budgeting process? Reach out to Doescher Group to learn more.