Budgeting is a planning process. It is an estimation of your expected revenue and cost over a specified period of time.
It could be long term or short term, depending on the tenure or duration of time it is set to cover.
Contrary to the various misconceptions of its applicability to only government parastatals and well established, big corporate organisations, budgeting is applicable at all levels of proper financial management including personal finance and your micro-scale businesses.
To further demystify the myths and wrong assumptions surrounding budgeting, I am happy to announce to you that it does not have to be a complicated process.
This is as simple as a listing all your anticipated revenue for a period say 2 months in the first 5 rows (it could be more depending on your income streams) of a 2-column table in Ms Excel, followed by your anticipated cost for the same period.
And there you have a Zero-Based Budgeting Approach (Fancy name, yea?).
On the other hand, a Fixed Budgeting approach means you are following a previous template of budget. If you keep proper records or practise budgeting before, you will scale through this category with ease.
We also have a Flexible Budgeting approach. Imagine taking the stairs, you already have a base and you are just adding few allowances.
This is applicable when you anticipate changes. For example, if inflation has risen by about 2% in Q2, you anticipate a proportionate increase in cost of production. Therefore, you are adjusting your budget to accommodate an increase of 2% in addition to Q1’s figure. Simple, right?
So, why should you budget?
1. Planning: Definitely things happen but budgeting helps you to project the possibilities of events and plan ahead.
2. Monitoring: There’s a rule that says “Always stick to your Budget”. Budgeting is still one of the best control tools. It helps you to objectively assess yourself to determine if you are still on track.
3. Control: Variance checks at the end of the period will help you to know areas you need to improve on. For example if you anticipated a revenue of $100M (Amen!) and you got $95M, your variance analysis might help you to discover that a bank has not cleared a transfer payment made to your company.
4. Accountability: Generally, when you know your limits, there’s a tendency to act up right?
5. Early Precaution: Budgeting helps you to take proper caution before time. For example, if you discover that you have a negative net balance after deducting all expenses from your revenue, it probably means you have to increase your price.
6. Overall, budgeting aids your decision making process and provides you enough data to solidify or justify your decisions.
Fellow builders, (that’s what I like to call entrepreneurs) let’s learn the act of budgeting. Selah.