The Dreaded Budget: Arbitrary Constraint or Useful Tool?

You can sense the email arriving any moment from your finance director. The subject line will read: “Discuss Next Year’s Budget”. You think, “Is there anything more corporate than a budget?!” Budgeting makes you anxious and has for years.

You wouldn’t even do it if it weren’t a requirement from the bank. This is the moment in every year where you are forced to make definitive statements about the future and put yourself in a box. You do not like being put into a box. You are an outside-of-the-box kind of person.

If this sounds familiar, I understand, but even still, I think you should embrace the budgetary process. Yes, it can be tedious and full of details. But the reward is great for those who treat the budget as more than a mandatory annual exercise for their lender.

The Bad Side of Budgets

One common complaint about budgets is that they encourage the “use it or lose it” mentality, which leads to unnecessary expenditures to preserve one’s budget size for the next year. While I have seen this behavior in large corporations, it is far less common in closely held businesses with engaged ownership. There are simply fewer places to hide.

Another complaint I’ve heard is that budgets form an artificial constraint. Once again, I find this to be more myth than reality in closely held businesses. Certainly, the budget can constrain spending and force the team to do more with less. But it also can enable collaborative conversation when unforeseen needs arise, leading to better outcomes.

The Good Side of Budgets

I cannot recall the source, but it was once said, “The problem with forecasts is that they’re about the future.” This is true. You will either beat or miss the budget, never nail it exactly. That said, the best thing about a budget is that it provides a measuring stick, which serves an invaluable role in helping you improve your business.

You might focus on up-time, production rates, truckloads, clicks, foot traffic, conversions, scrap rates, or whatever statistics matter for your industry. Yet when it’s all said and done, profit or loss is the measurement that determines business success or failure. So why not monitor progress toward that goal as well?

By setting an annual budget and measuring actual progress (preferably monthly), you will discover a lot about where you need to be focusing your efforts. Additionally, this process will make your company more bankable and investable, as you can discuss and address variances (positive and negative) to your budget in record time.

Are you allergic to budgets? Do you see them as a necessary evil right now, but would like to get more out of your budgetary process? At Doescher Group we help business owners tackle these types of challenges. If you’d like to learn more about our services for business owners, please reach out today.