Money & More: Understand Budgeting
In an uncertain world, it is important for entrepreneurs to drive their companies with sound intuition combined with the right navigation tools based on the principle of Finance. By activating financial thinking, businesses can take a forward-looking approach and strengthen their abilities to identify and mitigate risks, while allocating time and resources to properly pursue goals.
Following Connecting Founders’ pilot session on the Money & More series, where participants learned how to viably set goals using break-even points, they continued onto the Budgeting and More session to develop a deeper understanding of how to get to the goal using the power of budgeting.
Like many, entrepreneurs associate budgeting with stress and confusion, which is why they tend to skip it and propel their companies instinctively. But as those intuitions need validation for companies to truly monitor their performance, budgeting is a crucial tool that cannot be overlooked.
Proper budgeting helps companies keep track of their expenses and revenues, leading to smarter decision making, better contingency plans for unexpected downturns, and opportunities for profit.
What is a Budget?
A common misunderstanding of a budget is that it is a singular event, something that you only do once, and a static and definite plan that doesn’t require multiple changes. But as we navigate the uncertain world through the lens of Finance, a budget is:
- Not a plan, but a result of long-term planning. A budget translates the plan into required resources and outlines what you need, in a certain period of time, in order to achieve the goal.
- A mission statement that helps you understand your return. A budget makes sense of your journey and tells you when and how to get your return.
- A habitual practice that requires entrepreneurs to regularly revisit in order to measure and correct their performance.
- A checkpoint of your progress and a reality-check if you are on the right track towards your goal.
Forecasting and Budgeting
Forecasting and Budgeting are tools that work together to help businesses formulate their finances. Though it is important that entrepreneurs make a distinction between the two practices:
Forecasting is a projection of your business’s future destination. Using information such as previous performance and market assumptions, businesses can plan expected revenue and pinpoint a goal. A forecast represents your business vision, it is a crystallised plan of where your business sees itself to be.
Budgeting is an outline created in accordance with a forecast. It maps out expected resources and anticipated expenses that you need, in a certain period, in order to take you to the goal. Knowing a budget is knowing where you are going.
Think of it this way: forecast is your destination, and budget is your map.
Keep in mind that as business conditions change, you might need to adjust forecasts and budgeting. A good strategy is to make a habit of revisiting the budget regularly, being honest about it to make sure the budget remains relevant.
Why Budgeting Matters
There are five reasons why budgets are so powerful for businesses of any size. Budgets:
- Provide a coherent picture: with your forecast and budget in place, your intention is solidified, and your business has a ‘north star’ – it shows the big picture of where you want to be, your destination.
- Align team toward strategic objectives: now that a company has a ‘north star’, everyone is looking at the same goal. Budgeting brings the team on the same page and assigns clear responsibilities.
- Guide entrepreneurs in allocating resources effectively: given that resources are limited in an uncertain world, it is important that businesses are prudent about it. Doing budget variance analysis allows you to effectively allocate resources and make decisions strategically.
- Measure and evaluate the performance: throughout the journey, measuring not only gives a sense of whether you’re in the right direction, it also makes sure the team is accountable for their performance. Measuring provides an objective view of what improvements need to be made.
- Communicate with stakeholders: when you have a narrative for your performance in numbers, it makes your business more robust and compelling. Budgeting is a strong document for when you communicate with stakeholders, employees, customers, suppliers, and potential investors.
Budgeting is a powerful tool that paves the way for businesses to thrive. It gives entrepreneurs evidence-based and tangible data to validate their intuitions and make sound decisions for the future.
For Connecting Founders’ Money & More series, visit: