THE TRUTH ABOUT WHY YOUR BUDGET DOESN’T WORK
Today we are going to talk about some things that are pretty foundational but when completely grasped and implemented can be pretty radical for your business. Frankly, many business owners never quite understand how to marry these three things in a healthy way and they struggle for years. I don’t want you to be there so we are going to dig into this and glean some insight together.
These are:
- Accounting
- Cashflow
- The “B” word- budgeting.
Don’t be quick to shut me off yet, I promise not to bore you so just stick with me.
I think in theory and definition we all pretty much know what each of these mean and their purpose in our businesses but in practice, it is a very different story.
I want to discuss these in some pretty broad strokes because each of these three are tools to use to get the most out of our businesses. But we get so weighed down in the minutiae that we get lost and we can’t understand what the numbers mean and how they are a reflection of our business.
But first, let’s define them:
- Cash flow is the movement of money
- Accounting is the process of recording financial transactions pertaining to a business.
- A budget is an estimate of income and expenditure for a set period of time.
Super boring I know but I promise there is gold here if we dig for it.
Now let’s look at these from a timeline sense of the past, present, and future
- Past is accounting
- Present is cash flow
- Future is budgeting
So what does all this mean?
ACCOUNTING – THE PAST
Accounting is for the most part recording and analyzing things that happen in the past. We can predate items and record things ahead of time but that is not generally the case. We are using the accounting process to summarize, analyze, and report transactions to oversight agencies, regulators, and tax collection entities.
However, if we can use all that data to analyze those numbers ourselves and we can use all the information in our accounts to understand what has happened in the past.
The information provided by accounting can help us make better decisions in the future and to experiment with changing different levers.
There is a wealth of information that lies in your books and there is no end to ways those numbers can be crunched to tell a story of the business.
Nonetheless, accounting doesn’t really help us with the future or even today. It is however a great way to figure out if what happened in the past worked well or not.
YOUR BUDGET- THE FUTURE
Now, I know this is a bad one for many people but your budget is just an estimate of income and expenditure for a set period of time.
It’s really the best guess (often based on your books) of what is going to happen in the future like how much income you will make and spend in a particular period of time.
And honestly, it can be broken out as much or as little as you want. You could stop right there and only have an overall budget for income and expenses for a month or a year.
You could also get right down to the minute details of each category and plan out every penny.
Either way, your budget is just a plan, and business owners need to strike a balance in how much detail is actually helpful in your business and all that detail bogging you down but either way you need a plan.
A budget is also a great place to make a plan to hit your goals. If you have a goal to hit a certain income level this year, a budget helps you break it down into small chunks and figure out how much you need to make each month or week to hit your goal.
If you want to give a certain amount to charity a budget is a great way to plan out how much is doable at your level of business.
CASHFLOW: THE PRESENT
Now this is where I believe most people get tripped up.
As we mentioned before cash flow is literally just the movement of money into, within your business, and out of your business.
So this can be things like, how do my customers actually pay me? How does the money get dropped into my account? Is it by cash, check credit card, PayPal, Stripe payment processor, Etsy, or Shopify?
There are also the transfers you make between your accounts for instance keeping that savings account full, filling that account that is going to purchase your next big piece of equipment and transfers to your payroll account.
And then finally, the last piece is how is your money moving out. How are you paying your vendors? How are you paying your employees and contractors? Are you paying with credit cards that you will then pay the balances off or are you paying out of a specific account for specific things?
When you think about it, what path does your money take when flowing through your business?
This is a great opportunity to ask yourself when money is deposited into my account what do I do with it?
In cash flow, you can create a set of rules or guidelines or best practices for yourself. For example, I will always keep five thousand dollars in my emergency fund. So if that account is lower than five thousand dollars how are you going to fill it back up again when you next get your next deposit?
Or, I know I will always have to pay taxes so when I get paid I will always take 10, 20, or 30% of that income and move it into a tax account.
Many people just think accounting and budgeting are enough and then they don’t understand where all the money goes by the end of the month.
And this is where cash flow planning comes in. This is you asking, what am I doing with my money today?
Keep in mind that the past is what happened to my money, the future is what is going to happen with my money but what happens today is what determines how successful both the future and past are going to be.
So creating a healthy cash flow plan is crucial because as we move through time the future becomes the past.
MY PERSONAL STORY
When I and my husband had just gotten married, we used to budget out our finances, however we would always be frustrated about why we did not have enough money at the end of the month
We later realized we were not planning our cash flow and when we read Financial Peace by Dave Ramsey we came to our biggest aha moment.
In a particular cash flow planning worksheet that Dave Ramsey provides, it offers a roadmap of each payment you get and how you will utilize. When we filled out the worksheet, we discovered that our budget is just a future wish.
It cannot really work if we do not actually intentionally use the money for what it was meant for.
Do you have a cash flow plan? Having a plan for when, where, and how your money comes in is very important because if you do not have a plan for today, then your future and past are uncatered for.
Your business is only as good as the plans you have for it.
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