Too many small businesses operate without budgets. And many small businesses that do have budgets are not getting as much from them as they could. We’ve seen it over and over again.
It’s not because the mechanics are hard to handle. Everyone knows the basics of how budgets work: you track the inflow and outflow of money, and you do everything you can to plan for the future. In fact, the simplicity of that formula is what leads some small business owners to think that budgets aren’t worth it.
So what we’re discussing here is not what the budget implies, because if you don’t already know, you can easily find out. We’re more interested in why you should budget in the first place. Our suggestion, to put it bluntly, is that budgeting is a way of amplifying the creativity and adaptability that allow small businesses to thrive.
You don’t become an entrepreneur because you have a burning love for spreadsheets. At least not normally. Being an entrepreneur isn’t supposed to have anything to do with the budget. It’s not supposed to be about flipping through endless columns of variable costs or capping expenses. It’s supposed to be about having the freedom to combine innovation and risk-taking with passion and experience. It’s supposed to be about removing barriers, not building them.
This being the case, small business owners often see budgets as antithetical to the same entrepreneurial spirit. From this perspective, budgets impose suffocating constraints. They are artifacts of mega-corporate culture devised by people with mud hands in rooms without windows and with little light. They may be necessary evils for expansive and inhumane conglomerates, but when it comes to organizations that depend on individual personalities and individual decision-making, budgets are more onerous than useful.
It could be said that budget restrictions make small businesses less agile. Since agility is one of their main advantages over their larger rivals, budgets actually diminish the ability of small businesses to compete.
Or so history says.
Part of it is accurate. For example, it’s true that passion and innovation go hand in hand with entrepreneurship. It is true that small businesses must strive to turn their size into a competitive advantage. And it’s true that budgeting for small businesses is very different from budgeting for colossal corporations.
What’s not true is that budgets impose restrictions. Budgets impose nothing. They limit themselves to describing the limitations that already exist. Perhaps most importantly, they describe a company’s ability to cope with and even manipulate the constraints imposed on it by internal and external forces.
Limitations and entrepreneurial creativity
If you are an entrepreneur, you are aware that your business does not work in a vacuum. It’s part of an amazingly complex system. For example, you have your relatively immediate concerns, such as your employees and your local government. You also have relatively large concerns, such as national debt and foreign trade policy. No matter what happens, when you start a small business you are going to get caught up in laws, regulations and unavoidable economic realities, all of which will have a big impact on the way you operate.
In other words, no small business starts out in a position of unrestricted freedom. The same conditions that allow small businesses to exist also impose a number of limitations. Working capital, interest rates, minimum wage, the competitive minimum wage for professional employees – there are countless factors that limit what you can do and how much money is needed to do it.
You may recognize the reality of these factors, but if you don’t have a budget, you may not know exactly how they are affecting you. What particular constraints does a company in your sector have to deal with? are there some that have a disproportionate impact on you because of the way your business operates? can you make changes to reduce its impact? are there restrictions that are handled in a particularly productive way? can you turn this productivity into an advantage over your competitors? do you address some restrictions in the same way as others, even though you might be doing a better job with them?
Speed, spontaneity, and cost-effectiveness
Small businesses, precisely because they are small, tend to be better than their larger competitors at taking quick and decisive action. It is one of their vital advantages. In the same way, it is one of the challenges that all entrepreneurs are forced to face. You will be forced to react at any given time to new opportunities or dangers arising in the market, that is a fact.
What is less certain is the profitability of your reactions. Obviously, acting or adapting quickly isn’t much use if it results in a loss.
So what information will you use to make your quick decisions? Do you have a detailed and practical breakdown of your business strengths and weaknesses? Do you know exactly how many resources you can afford to redistribute at any given time? Do you know how efficiently different aspects of your business tend to use the resources you dedicate to them? Are certain aspects of your business already tense? Are some aspects equal to the potential for expansion?
A budget gives you a diagnostic reading of your organization. It tells you how much stress the business can handle and what areas can handle it. Therefore, it helps you decide whether acting conservatively or aggressively in the short term will improve your long-term performance. Without a budget, you’ll be relying too much on guesswork, and many of your quick decisions can be unnecessarily risky.