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The Misunderstood Budget

March 18, 2015

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Budgets are one of the most common yet misunderstood business tools.

Often what comes to mind when we think of budgets are cuts and cost control. When we ask owners why they don’t use them, we hear that “budgets are a waste of time”, “I’m not a big corporation, I don’t need one” or “I don’t want to be locked into a budget”.

When used properly budgets are an effective business tool. A budget is the financial roadmap to achieve your business goals and sets the basis for how to get from where you are today to where you want to end up.

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Here are a few simple steps to create an effective budget that will work for you:

  1. Determine your financial goals by month, year or even longer.
  2. Lay out the investments and costs required to reach your sales targets.
  3. Look at the big picture then drill down to product or services lines, customers and even a per transaction basis.
  4. Ensure that your budget and business plans are consistent. Budgets are not about cutting costs, they are about supporting sales and profitability.
  5. Be practical when developing a budget. Does it make sense and is it achievable?
  6. Regularly (monthly) compare actual performance against your budget.
  7. Take the time to reflect on why your actual and budgeted results are different.
  8. Make sure to revise your budget if situations and/or goals change.

It is important to use your budget in order to focus your energy on the areas necessary to meet your business goals. By regularly monitoring your actual results, you can see if your business is on the right track and where there is room for improvement.

Budgets are hard work but they work, which is why the most successful companies all use them.

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