- William Feather -
“Liz, here are your allowances for the week, remember your budget!”
2 days later…
“Mom, I saw this great dress, I have to get it for Friday’s party! Can you give me $20?”
“Liz, what happened to your allowance? What happened to your budget?”
“Mom, I don’t know, I don’t know. It just never seems enough, can I just get $20?”
“Oh Lizzy, you need to control your expenses….”
(Years ago this was a typical weekly conversation between my mom, an esteemed owner of an accounting firm, and me, Liz, an over indulgent teenage spender)
My first year as a business owner was a very exciting, hectic and anxious one.
I remember the amazing feeling of seeing how my little idea, my sweet dream, is growing to be a real business, I still remember my first client (ok ok, it was Jenny but she did pay for her hot chocolate), and the first statement from the bank which showed that, wow, I made money.
But most of all, I remember the anxiety. I believe anxiety is a feeling all small business owners share. You know what I am talking about, right? It is the feeling of losing control, the constant uncertainty. Not knowing if the next day will be a successful one or the one to forget. It is the feeling of not even knowing if you are progressing or not, some days I felt I am the queen of the world, my business had no limits (Valentine’s Day is always one of those days), and then I had the hot summer days which for hours no one showed up at my store. I was just sitting there almost ready to give up. I hated those days. The dream was not sweet anymore. It was pretty sour. But then slowly things picked up until the grand holiday season.
I was working hard, but I knew I am doing something wrong, what was it? A business should have some uncertainty but do I really have no control on the outcomes? What can I control? Hello, can business owners control their business?
I remember that evening, it was my second year running my business, it was a late evening, almost time to close the store, one of those late winter days, when people just want to go back to their warm homes. I was sitting with my coffee in front of Charlie, who as always held his cup of hot chocolate. I told Charlie about my anxiety, about not knowing what will happen tomorrow, about feeling out of control, I did not know if I will make money, I did not know if I have enough money to pay my bills.
Charlie looked at me. He had his deep thoughtful look, I like people who think. He smiled and said, “Liz, the bad news is that you can never be in full control, however, the good news is, in business there are many things you can control and can prepare for”.
Charlie put down his glasses on the little coffee table and said “do you remember your lemonade stand, do you remember how you calculated your break-even point?” I nodded still not sure why Charlie mentioned it. Charlie continued, “Knowing your break-even point ensure that you know how much you should price your product or service in order to make a profit, but your break-even point is based on the level of your business expenses needed to run your business and create your product or service”.
Charlie smiled and continued “now, one of the most important tools a business owner has in her toolbox is the business budget and your business projections”.
“Liz, here are your allowances for the week, remember your allowances.”
“Liz, here are your allowances for the week, remember your budget!”
All I can think of was, “not again, the dreaded budget.”
Charlie looked puzzled as I shivered in my chair, I quickly snapped out and said, “but I know how much things cost, I don’t need a budget”. Charlie looked sad, “Elizabeth, this is very important, many business owners run their businesses for years without a budget or a plan, thinking they know what they are doing. Sometimes they get lucky and the business is successful but in most instances, wrong decisions based on gut feelings are made and the business joins the millions of other businesses in the big business graveyard”.
He continued, “a business budget forces you to think hard about your expenses, both the variable ones and the fixed ones. It makes sure you are aware of how much it cost to run your business”.
“Without budgeting, tracking your expenses and matching it to your projected revenue, you will never know how to price your products and you will not know if your business can be profitable.”
Budgeting is the only way to track, control and compare your projected expenses to your actual ones. It is your game plan to control your business. Without having a blue print, a plan which indicate your budgeted expenses and projected revenue, you cannot control the business, and if you don’t control your business, then the business controls you.”
I thought for a minute and said “of course I want to control my business, but how will having a business budget help me with that?”
Charlie took one sip from his hot chocolate, and said “before we go into the details of your chocolate store budget and how to construct it, let’s go back to your lemonade stand and your break-even point. Liz, do you remember the assumptions you made when you calculated your break-even point?”
I thought for a second and said “Jenny and I used 10 cents as our assumption for the price for a lemon. We also assumed we would need 20 lemons to make one jug of lemonade. We then assumed each jug of lemonade would be sufficient for 10 tasty cups of lemonade and the price for 10 plastic cups would be 50 cents”.
Charlie smiled and continued, “excellent Liz, using these expenses and assumptions, how much should your weekly budget be if you assumed selling 5 jugs of lemonade a week?”.
I was a bit lost but tried to think it over, “if Jenny and I assumed we would sell 5 jugs of lemonade a week, our weekly budget for making the lemonade jugs should have been $10 (to buy 100 lemons) plus $2.50 for plastic cups (to buy 50 plastic cups) for a total of $12.50 weekly”.
Charlie stood up and said, “great Liz, What do you think if you and Jenny ignored your budget, went to the supermarket and bought your 100 lemons for $15 instead of your $10 budget, what do you think would happen than?”.
My thoughts were running a million miles a minute, I think I got it, I told Charlie, somewhat embarrassed, “Jenny and I based our break-even points on those assumptions about our expenses, if we couldn’t control our expenses, if we ignored our assumptions or couldn’t stick with our assumptions, our break-even point calculation and our estimated profits would have been all wrong, oh that would be a disaster”. And deep inside, I thought to myself, “I now understand, mommy”.
Charlie, still standing up, clapped so enthusiastically that I thought he is going to get a heart attack. He was beaming with happiness.
I remember Charlie saying “Creating a budget is not an optional activity, tracking your budget is not an optional activity, adapting your budget to reality is not an optional activity, sticking to your budget is not an optional activity if you want to have a successful business”. He continued by saying “business owners think they know their expenses, they barely track them, they don’t budget for them, they sometime know the big expense items, but they forget the little ones”.
OK, now Charlie was in full teaching mode, you know it is going to come, right? He finished by saying, “Benjamin Franklin said – Beware of little expenses. A small leak will sink a great ship. A business should comply with its budget and should track all expenses”.
It is quite late, I promise to write a part 2 of this post which I will explain how you go about creating your business budget, what should be included in a business budget, how often you need to review and what to do when a budget and your business reality collide.
Question: Does your business have a budget and how often do you review it?
Liz (A budget master)