In the early stages of a new business, entrepreneurs do not pay much attention to budgets.
Financial forecasts that estimate revenues and expenses are part of the business planning process. But these are really just estimates, since so much is unknown about what will actually happen as the business begins to grow. Because of this, it is impossible to develop accurate budgets. Managing cash flow is a week-to-week or even day-to-day challenge that is a reaction to what bills need to get paid first based on what revenues have come in the door.
Budgets are based on history and experience in the business. Budgets also require that a business has stable and predictable revenues. So for most new businesses, the lack of any financial history and too much uncertainty about the future means that creating a budget is really not plausible
But over time, if all goes well, the revenues of the business will become more stable and predictable. When this happens, it is a good time to start implementing the budgeting process.
While setting budgets may seem like a relatively simple process, it can profoundly impact on the culture of an entrepreneurial firm.
The culture in a start-up business is defined by the process of exploring and developing the business model that will bring the business success. The culture tends to be based on informality and adaptability. The early stages of most new ventures can best be described as “controlled chaos.”
Even though the entrepreneur may decide that the business has matured enough to begin the budgeting process, it is important to keep in mind that due to the culture that has formed during start-up the employees may not be ready for a business guided by budgets. Elements of the informal and unstructured start-up culture will remain even as the business begins to grow.
Budgeting needs to be implemented deliberately. The entrepreneur must intentionally shape the business culture to ensure the team will begin to embrace the budgeting process.
The first step in implementing budgeting is to make sure that key employees are familiar with the financial statements of the business. This may take a few months of reviewing monthly financial statements so they can begin to understand the financial model of the business and their role as managers in influencing revenues and expenses.
The second step is to educate everyone about what it means to have a budget in a small business. Budgets in small businesses are not set in stone for a year, as is the case with large organizations. Budgets in small businesses need to be a work in progress that can adapt to changing conditions, both good and bad. New opportunity can lead to an increase in the budget. A downturn in sales means that budgets will need to be trimmed to help preserve profits.
Employees need to understand that small business budgets are a tool to help achieve profit goals, and not just something used to control expenses. Tying compensation and bonuses to reaching profit goals can help ensure that employees take ownership of the budget as a dynamic management tool.
As an entrepreneur begins to build a business based on a proven business model, a flexible operating budget is a critical tool to help the leadership team more effectively manage growth.