Budgets bring business dreams into focus

A financial budget serves as a roadmap for businesses, local business consultants say. And by helping synthesize vision with reality, it can outline what the future may hold and keep business operators on track.
Map, measurement tool or motivator ? regardless of how it?s described ? a budget is a must-have tool for businesses.
Much like a household budget, a business budget details revenues and expenses. It charts where the money will come from and what costs must be measured against that income.
Kelly Peters, director of the Loveland Center for Business Development, frequently works with startup businesses. She said a budget forces entrepreneurs to look very specifically at the costs of whatever endeavor they have in mind.
?I tell them not to guess, like you would maybe on a home budget,? Peters said. ?This is real specific. I usually have people go find out what the utilities are going to cost each month.?
Digging into the nitty-gritty of expenses brings reality into focus for entrepreneurs who often are more tuned to what they want to do or create than what that will cost.
?Most true entrepreneurs don?t want to look at the bottom line, really,? she said. ?They just want to go for it.?
Looking carefully at expenses gives a better picture of what it will take to break even, Peters said. ?That, in turn, has you focus on where you?re going to get your sales from.?

Not always top priority
Don Chenoweth, president of Chenoweth & Associates Business Consulting, said it?s not uncommon to find successful businesses whose accounting records are in disarray. Budgets are not part of what these business operators do on a regular basis.
Frequently, he said, they are successful in spite of themselves, perhaps because they have a good reputation, they?ve been in business a long time, they?ve hit on an unfilled niche or a combination of all the above.
Whatever it is these business operators are doing may continue to be successful, but the approach throws up roadblocks should those operators decide to sell. ?A prospective buyer wants to see financial statements,? Chenoweth said.
Further, these businesses share something eerily in common with many of their floundering counterparts: that is, poor accounting records.
Chenoweth suggests that business operators begin the budgeting process by planning. ?Budgeting and planning are completely intertwined,? he said.
It?s important to have a strategic plan for the businesses in place first to determine if the endeavor is going to be worthwhile to pursue. The budget follows.
?You quantify the strategic plan, and that becomes the budget,? he said.
With a strategic plan in place, the first step in creating a budget for an existing business is to look back at the financial history of the entity ?to get an idea of where you are today,? Chenoweth said.
There are advantages and disadvantages to having a financial history, Chenoweth noted. History is only completely accurate if the future looks exactly like the past. It is only an indicator, in most cases, of how the future may look.
Startup businesses should also begin with a strategic plan, Chenoweth said. Without a financial history, they frequently begin setting a budget by answering a long string of questions. Where will the business be located? How much will rent and utilities cost? How many employees will be needed? What sort of equipment will be required? What about insurance, advertising and payroll taxes?
The process, much like formulating a strategic plan, helps further hone the idea for the business. It can also point out whether and when it may be necessary to borrow money.
?If you keep on top of this, you can start a relationship with a banker before you need the money,? Peters said. ?When you start a business ? whether you need money or not ? getting to know your lender is so vital.?

Work backwards
Peters suggests that people work backwards from their expenses when beginning to set a budget. It?s easier, she said, to look at what is going out. ?After that, you can go back and figure out what you need.?
Once all of the expenses are in line, it?s time to work out revenue projections.
Projecting revenues can pose a challenge for people, Peters said. ?I think people never think they can project sales accurately. Therefore, they don?t even want to attempt it.?
However, she noted, if homework is done and the groundwork laid, it shouldn?t be too hard to project sales and revenues. Paying attention to the details can help build solid projections.
Peters recommends that business operators do three budget scenarios: best-case, worst-case and in-between.
?People don?t think they?re capable of guessing, and they don?t like that because it?s not accurate,? she said. ?I try to validate that it?s better than nothing because you?re going to learn from the process.?
Chenoweth doesn?t recommend multiple budget scenarios. ?I grew up in the old days when we didn?t have computers. We did budgets on adding machines with pencils.?
Today, it?s possible to run dozens of scenarios, he said. ?You can come up with a hundred.?
Rather than drowning in numbers, he advises applying common sense and attending to the strategic plan. ?In my mind, you do that each step of the way,? he said.
Both Chenoweth and Peters note that a business budget should be a living document ? one that is consulted and updated on a regular basis.
?Budgeting should go on a lot more frequently than just looking at your business plan,? Peters said. ?I tell people to revisit it at least every six months.?

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