Everyone knows that planning for success will help you attain it, but why is this so? When you plan, you are eliminating uncertainties by defining what you need, how you will get it, and how it will help reach your ultimate goal.

Everyone knows that planning for success will help you attain it, but why is this so? When you plan, you are eliminating uncertainties by defining what you need, how you will get it, and how it will help reach your ultimate goal. Planning allows you to focus you resources (money, time, labour, etc.) in an efficient way and, sure, it does take more time up-front but the resources it saves far exceeds the initial cost.

For example, have you ever gone to the grocery store without any idea of what you want? You wander around looking at everything and decide to buy stuff you may or may not even need. When you get home you realize the whole trip took a lot longer than you wanted and you still forgot some important items. However, if you take the time to make a list and stick to it, the trip will be far more focused and you will be less likely to miss important items. So how does this relate to my business?

Budgeting is one of the most important processes any business can undertake. It is a map to success – it shows you what resources are needed and how you intend to satisfy these needs. Every budget starts with some main assumptions, or estimations, of the future. You will need to figure out expected sales volume, what expenses you will be paying, and if you need financing, what your best option is. From here you can start to fill in the budget line by line. In the end you have a template for success. During actual operations you can use the budget to assess management's ability to meet organizational goals.

After obtaining some actual figures, you must compare them to your budget. Even if you are off by a lot, this step can not be passed over. You need actual operational results to refine your assumptions and plans, and so you can be aware of economic events that were not budgeted for.

If you can create and monitor the budget over one month cycles, you will have a better understanding of where all your cash goes and will be able to make improvements over time. Budgeting also gives guidance to your employees, managers, or others by showing them where cash should be spent in order to maximize reaching organizational goals.

Another important aspect of budgeting relates to capital expenditures. This process involves estimating useful lives of assets and when you will need to purchase new ones, or make repairs, etc. This needs to be incorporated into the budget because these purchases are often the largest a company will make, especially a small business, so any uncertainty regarding capital assets could lead to large debt.

Bringing it all together:

A budget starts with cash you have and cash you will be spending in the near future. You prioritize the most important expenses first and fill in each subsequent expense as you go, by including dates the expenses are due.  

Budgeting can also help you to prepare for a larger purchase and seek appropriate financing before it becomes urgent.   

As you become more confident with where your money is being spent, you can refine the budget and begin to include estimations of inflows, or maybe even create some forecasts. However, you should use caution with forecasts last as you cannot depend on them. You can only rely on the cash you actually have now.

In the end, you should be able to show where all your money will go and be able to stick to this plan so you can tell what the end is before you even start. When the budgeting process becomes successful for your company you will have more time to spend on external opportunities instead of worrying about your financial position.