Everyone Advises it Because it Works

Creating a budget is a great way to give yourself an overview of the financial position of your business. You get a snapshot of the future of your business that you can run through Photoshop and edit as much as you like. You can see how feasible your ideas are and you’ll be able to create the optimal revenue and cost structure, and plan contingencies for things that have not even happened yet.

The Alternative is Costly—Operating without a budget is like stepping onto a battlefield, void of all your senses. You may walk through unscathed, but it’s safe to say that the odds would not be in your favor.

You Have to Follow Through

The success of budgeting is achieved in two parts: creating the budget and following it. Creating a robust budget is no easy task, but following it seems to be the bigger issue. Without discipline and consistency, you may find that existing outside the budget, when done once, becomes increasingly easier to do, until following the budget is a thing of the past altogether.

In order to avoid this, it would be advisable to refer to your budget any time you reach a decision-making point with regards to revenue or, more importantly, expenses. Understating revenues is a pleasant surprise, but understating expenditure is a stressful experience.

Anyone Can Make a Budget

In order to create your budget:

1. Outline and combine all your revenue sources, broken down into daily or weekly earnings, and then sum up to estimated monthly earnings from there.
2. Look at all your direct costs: costs that arise in the course of providing your service and are entirely dependent on the industry in which you operate.
   • An example of a direct cost to a car manufacturer would be the cost incurred in acquiring the car parts, as the more cars are manufactured, the more money is spent on parts.
3. The next item to consider on your budget are your fixed costs: expenses that remain unchanged (within the period of a year) no matter how much revenue you generate. If you can keep these expenses as low as possible, while increasing your revenue, it’ll have significant positive impacts on your profits.

When you have all that data, you can calculate important numbers, such as:

• The proportional increase in your direct costs to increases in your revenues
• The fixed costs that you can adjust downwards to increase profits
• The amount of extra money to hold in case of any eventuality that has not been accounted for within the budget.

With all these benefits, it is easy to see how important creating and implementing a budget is.