Dave Says: The Concept Is the Same

Dear Dave,

I know when it comes to personal finance, you’re a big fan of living on a written, monthly budget. Should you do a small-business budget the same way you do your household budget?

— Joseph

Dear Joseph,

The concept you’re working with is the same, but they’re still a little bit different. When it comes to a small business, you’re trying to project your income and expenses, thereby projecting your profit for the month and the next two months after that. Those three months make what we call a quarter. If you’ve been in business for a while, you can reach out further than that and usually do a reasonably accurate job of projecting the entire year.

It all really just comes down to this: You still have to plan your income and your outgo. Some small-business owners tend to forego long-term planning and live hand to mouth and crisis to crisis. Sure, they may look at the profit and loss statements, but that’s kind of like looking in the rearview mirror while driving. Budgeting’s not rocket science. The budgeting and planning don’t have to be super sophisticated, as long you’re realistic about how much revenue you’re generating and your operating costs.

A lack of planning and handling money properly—making money behave by projecting revenue, expenses and those kinds of things—are the main reasons most small businesses fail. Then, the owners turn around and blame “cash flow problems.” That’s a pretty vague term, and in most cases, it’s a bunch of double-talk. It’s usually coming from someone who borrowed money and couldn’t make the payments or had too much money going out and not enough coming in.

You’ve got to project into the future and think about what you’re going to do and how you’re going to make it happen. That’s really all a small-business budget is. You’re saying, “Realistically, this is what we should make this month, and this is what we should spend this month.” It’s what I tell my team when they’re doing budgets. And when you think about it, it’s not even goal setting so much as it’s having a knowledgeable and informed conversation with the marketplace.

I hope this helps, Joseph!

— Dave