As Natasha Munson writes in “Life Lessons for My Sisters: How to Make Wise Choices and Live a Life You Love!,” “Money, like emotions, is something you must control to keep your life on the right track.”
Likewise, having an effective budget helps entrepreneurs get a hold of their finances and make effective decisions that grow their businesses.
Money is the lifeblood of any company. If you have a great understanding of where your money is, then you will also have a great understanding of where your business is, as well as where it can go.
Here are my top five tips for new entrepreneurs, young and old, when it comes to budgeting.
TIP #1: COMMIT
The biggest budgeting mistake new entrepreneurs tend to make is failing to commit to their budget.
Budgeting isn’t just something you decide to do one day. To be effective, you need to commit to your budget, meaning you need to stick to the amounts you decided on previously.
In my experience, many people think budgeting is deciding how much money to spend on certain things. They say, “I should only spend $100 this month for this thing and $200 for this thing.” If something comes up and they want to spend more than those amounts, they say, “Okay, it’s fine. I still have the money, so I can do that.”
Once you break that commitment, you’ll do and the next, and the next. At that point, you’re not budgeting anymore. You forgot what your priorities were, and you haven’t built up a reserve for emergencies.When the time comes that you need money, you’ll ask what happened, but it will be too late.
Making the initial decisions about your allocations and putting them into a spreadsheet is just the first part of the process. The real work comes later. You need to check your budget sheet and actually follow what it says.
Your commitment to stick to your budget model is what makes it effective. If you don’t, then it doesn’t matter how brilliant your model is—it’s not going to work. Your money will flow everywhere, but without helping you or your business.
TIP #2: START YESTERDAY
The best budgeting decision a new entrepreneur can make is to start budgeting even before starting their business. This helps foresee potential financial troubles, whichenables them to avoid those issues.
Doing this should also prepare you to weather any problems that emerge. Effective budgeting is preparedness. For this reason, I recommend building up your cash buckets. This is especially important at times like the present, when many wonder if a recession looms on the horizon.
Once your budget is in place, have a lot of patience. While you won’t see the benefits of your budgeting decisions in a snap, these will come with time. In retrospect, you will be grateful for your budgeting discipline.
TIP #3: BUDGET YOUR PROFIT FIRST
Many new entrepreneurs assume they will do nothing but spend for the first few years of their businesses, thinking they aren’t going to make anything.
I recommend a different approach, called Profit First Accounting. It’s an accounting method in which you budget your profit first before your expenses, ensuring you make a profit even during the first years of your business. All you have to do is allocate your money accordingly, stick to those decisions, and control expenses as needed.
TIP #4: REASSESS WHEN NECESSARY
Sometimes, companies need to revisit their budgeting decisions and make revisions. No one gets their budgeting perfect on the first try, everyone has experienced months that don’t go to plan, and there are always going to be unforeseen periods when the economy struggles.
For this reason, flexibility is one of the most important characteristics an entrepreneur can have. You’ll need to adjust with the times, being agile and shifting to new solutions when needed.
If you find yourself needing to break your budget, it’s important to sit down and reevaluate what went wrong. Was this a temporary expense, or will it continue? Do you need to increase sales and income? Should you invest more in marketing the company? Is it possible to cut back on expenses that aren’t necessary anymore?
Be honest with yourself about what is and isn’t working. The next month, however, it is particularly important to be mindful and conscious of how your budgeting is going. Track the new numbers closely to make sure that you don’t break your budget again.
TIP #5: BUDGETS CREATE BETTER LIVES
Budgeting isn’t just something to apply to your business. It’s also a positive habit that can support your personal life.
I started budgeting for personal reasons during my wedding, when I needed to track where every penny was going, and I’m still budgeting for my household to this day. Doing this has helped me reach my financial goals and create the life I want for myself and my family. It gives money the potential to grow, creating wealth for the long term.
A lot of people are insecure about looking at their finances and budgeting, so they don’t do it. But this is a mistake. Budgeting actually makes you realize that you make more than what you need, which is a source of great relief and the foundation for self-confidence.
