“Budget” is a common word that surfaces about three times a year. It is the first “tool” many people turn to when:
- They are starting a new project or business
- They need to cut back on their spending (“tighten your belt”)
In my opinion, budgets are, aside from social media, one of life’s greatest time-wasters.
You come away from the exercise of drawing up a budget with a nice, glossy, multi-coloured piece of paper or spreadsheet.
But really all you have done is lost time on a pointless exercise. You will never get this time back.
Why are budgets a waste of time?
Budgets are based on hopes and dreams, guesstimates and incorrect data.
The starting point in doing a budget is a blank sheet with a list of generic expenses, which you may or may not actually use.
You have to insert numbers which you think may be correct or what you hope are correct. But this is all wrong!
What you really need is some real data from which to work.
Some examples are prior-year figures or current year-to-date figures. This eliminates guessing.
Budgets are created with money left over every time.
Depending on the entity and circumstances, a profit may not be possible. A budget can be prepared with a loss in mind.
If you are a new business with no customers or a business that requires start-up capital or assets to be acquired, chances are you will not be turning a profit in the first year or two.
Budgets are rarely used as they should be
When did you last update your budget? Well, that is the point.
You create this fantastic document and then never look at it again!
It’s important to remember that budgets are living, working documents. They are fluid.
They change according to what happens in real life. The more data that is available, the more the budget changes and it has to be changed accordingly.
It may not change much, depending on how accurate it started out to be.
What is the point of you doing a budget?
There has to be a valid reason for creating a budget. Otherwise, it’s just a waste of time. It does not have to be deep and meaningful.
It can be as simple as keeping track of money inflows and outflows. This will be different in each case.
You can also create budgets for a particular project that you are starting and this can be incorporated into your overall budget.
Some of the reasons you may not use a budget are dealt with in this post.
Remember the timeframe
A budget must have a time frame or period for which it is designed.
Again, this can be simple. A month, a quarter or the length of a particular project. The bottom line is that it should have a time frame.
If the time frame is lengthy, for example, a year, it’s advisable to have data to work with.
Here’s an example: You started a new company in December 2019 with a February financial year-end.
With business going well, the company enters the 2021 financial year. You are looking to create a budget for the year.
This will be difficult since you have not yet traded through a full year.
If you were to create a budget for the full year, the figures would not be accurate from about June 2020.
Because you only have three months of data to work with, you could create a budget for six months with reasonable accuracy.
As these are working documents, the longer you trade, the longer the budgets could get.
Budgets vs projections
Projections are what you “would like to happen” in the next X number of months or years. While projections are necessary, they should not be confused with a budget.
Budgets tend to be more realistic than projections.
From the point raised above, budgets can be incredibly useful. They can also be an incredible waste of time. It all depends on how they are used and what they are used for.
Conclusion
There are companies and individuals that use budgets in the correct way.
However, in my experience, about 95% of budgets are not used properly.
I hope this article has provided some food for thought.
- If you have a comment or query around budgets, contact us.