If you’re going on a road trip, you wouldn’t leave home without a map (or at least a smartphone and an address). If you’re enrolling in college, you wouldn’t show up on campus without a schedule of classes for the semester. But for some reason, when it comes to personal finance, many of us don’t take the absolutely essential step of creating a budget.
But if you intend to be successful it’s crucial to have a plan, especially a financial plan. I’ve been an entrepreneur for over 45 years, running my own law firm, literary publication, and real estate company. I’ve written a lot of budgets, big and small, over the years and have learned (often the hard way) some important lessons about effective financial planning. Below are 5 tools you can use to begin or improve your budgeting today:
If you think that simply having a basic idea of how much money you have in the bank and how much money is flowing in and out on a monthly basis is enough financial planning for your business, you’re wrong. Get your budget down on paper (or in a bookkeeping program or spreadsheet), no matter how simple it is. You don’t need to become an expert in the finer points of budgeting, like the difference between cash and accrual accounting. Simply write down all of the income that you reasonably expect to receive in your next operating period, usually a month or year, then write down all of the expenses that you reasonably expect to incur. Include enough categories of income and expense to make your budget meaningful. Then take your total expected (budgeted) income, subtract your total expected (budgeted) expenses, and viola! You have your budgeted net profit (or loss).
2. Be Realistic
I’m an optimist by nature. But in the cut-and-dry art of budgeting, it’s important to be conservative when you project your expenses and income for the year, no matter how optimistic you feel about the coming year. As the great philosopher Publilius Syrus wrote in the first century BC, “Never promise more than you can perform.” At the end of the year, your financial statements will tell you how close you actually came to meeting your budget. If you’ve been realistic, your statements will most likely be pretty close, and you will have few bad surprises. And if your optimism was warranted, some good surprises as well.
3. Do It Early & Often
In the early 1990’s my brother David began his own business, and would frequently ask me for my advice. “Sure. Let me see your financial statements,” I would say. And he would respond, “I don’t have them yet. Maybe in a few weeks.” As a result he didn’t know how well, or poorly, his business was performing until he filed his income tax returns the following year. By then it was too late for him to do anything about it. He was, in essence, flying blind. I create my budgets early on so that I have a battle plan for the coming year, and update them once or twice every week. This way, I have the most up-to-date information possible and can make adjustments to my strategy that are crucial to my business’s success.
4. Stick to It
The biggest advantage of using a budget in your personal or business life is that, if you follow it, you will spend less money than you expect to bring in. Let’s take dining out as an example. When I am invited to lunch or dinner with a friend I like to say, “Yes.” If I had a monthly food budget, however, I might say, “I only have $45.00 left in my food budget for this month. Maybe we can have lunch next month unless, of course, you want to treat.” The same goes for any category in your business.
5. Hire An Accountant
At this point some of you might be saying to yourself, “I’m afraid of numbers, and I’m not going to do this.” Fair enough. But if you are unable to do it for yourself, I respectfully suggest that you hire an accountant to prepare a simple budget for you, and then have your accountant inform you every three or six months about how you are doing. The way I see it, you can pay an accountant to make your budget now, or pay an attorney a lot more money later when you run into trouble.