As an entrepreneur, you likely place a high value on freedom. When the word “budget” is mentioned, you might cringe and feel like it hampers your freedom. But it’s really the opposite.
That’s one reason I like to call them spending plans instead of budgets. More people get more excited about spending than budgeting. If we plan our spending, we’re really just budgeting.
Here’s why creating a spending plan also creates freedom in your life.
According to a 2019 article in Small Business Trends, “Startup Statistics – The Numbers You Need to Know,” 82 percent of businesses that fail do so because of cash flow problems. Even if your business is no longer a startup, the failure rates for businesses started in 2014 were as follows:
● 20 percent failed to make it to their second year,
● 30 percent failed to make it to their third year,
● 38 percent failed to make it to their fourth year, and
● 44 percent failed to make it to their fifth year.
Many of the reasons for business failure can be prevented with good financial planning. Here are some benefits of making a spending plan and managing to it.
● A spending plan helps to control spending by seeing what’s available beyond your cash balance at the time.
● Impulse spending can be curbed by avoiding spending on anything that is not planned for.
● If a loan is needed to finance the business, you have a better idea of how much you need and how to best schedule the loan payments.
● Your chances of business success increase with a spending plan.
● You can see future revenue shortfalls so that you can take proactive steps to boost sales.
● You can better manage growth.
● You have a better idea of your profit level so you can make pricing changes, tax predictions, appropriate compensation, and other strategic changes.
● You can plan for large expenditures such as asset purchases and time them better for cash flow, loan acquisition, and other considerations.
Getting started with a spending plan is easy. If you’ve been in business for more than one year, you can start with last year’s actual figures and then adjust for the growth and changes you want. The numbers can be input into your accounting system so that you can get reports that measure actual progress versus the spending plan numbers. You can then make good business decisions based on your variances.
We have a great template to help you get started that also incorporates your Profit First accounts. Since those are not expense accounts, your accounting system usually won’t allow you to budget for them. However, it is important to see how the profit, tax and owner’s pay you’re setting aside first now affects your operating expenses. Our spending plan template gives every dollar in your operating expense account a purpose.
When you take a little bit of time to create a spending plan, you really can enjoy the freedom of knowing you’re on track to make your numbers. If we’re not already working with you on your spending plan, feel free to reach out to find out more.