Are Business Budgets Like Personal Budgets?

Aug 1, 2012, 9:06 PM | Updated: 10:22 pm

Question: A listener asks on Twitter if you do the same budget for a business as you do for a household. Dave explains that a business budget doesn’t have to be complicated.

Answer: It’s a little different, but it’s still the same concept. What you’re trying to do with a small business is project your income, project your expenses, thereby project your profit for this month, next month and the next month. That’s a quarter. If you’ve been doing it a little while, you can reach out there and look at what you’re planning your year to look like. You ought to know that in June you might have a different revenue than you had in April for some reason or another. Maybe some event—maybe something—is happening.

I think the deal is that you still have to plan your income and your outgo, and that’s all a budget is. You’re driving by looking out the windshield. Sometimes in business—small business in particular—we (I’m a small-business guy myself) have a tendency to just live hand-to-mouth and crisis-to-crisis. We don’t do a lot of forward-thinking planning. Yeah, we look at the P&L (profit-and-loss statement), but that’s only driving with a rearview mirror. You can’t drive by looking out the back only—looking at the past only. You need to look forward too.

It’s really not rocket science, depending on the size of your small business. It can be fairly primitive. It doesn’t have to be a super-sophisticated idea, but you do need to look down and say, “Hey, I’ve got a lawn-cutting business. I’m going to cut this number of lawns. I charge this much, so my revenue this month will be total of X. We spend this on repairs on average. We spend this on new equipment on average. We spend this on gasoline on average. I spend this on payroll on average. Those are going to be my expenses for the month, and this is my revenue for the month. There’s my profit for the month.” If you’ve got a bakery shop, then you’ve got to buy the materials to do the baked goods, but you’ve also got to pay the rent. You’ve got to buy the insurance. You’ve got these bills that you know are there. Just begin to be intelligent about knowing where they are and where the money’s going.

I can tell you that it’s one of the top reasons that small businesses fail. They don’t do a good job of handling their money—of making the money behave and projecting revenue, projecting expenses and those kinds of things. Then they turn around and blame cash flow problems. “Cash flow problems” is a generic term. What does that mean? That means you borrowed money, and you’ve got too big a freaking payment. What does “cash flow problems” mean? It means you didn’t have enough money coming in, or you had too much money going out. These are predictable events. You certainly wouldn’t plan to have “cash flow problems,” would you?

You’ve got to project into the future and think about what it is you’re going to do, and that’s all a budget is. You’re saying, “This is what we should make this month. This is what we should spend this month realistically.” It’s not even a goal. I try to tell our folks around here when they’re doing budgets, that’s not goal-setting. This is realistically you having a conversation with the marketplace. You look at the marketplace and say, “Mr. Marketplace, Mrs. Marketplace, Joe and Suzy, I think I can sell you so many widgets. Out of those widgets, I think that my cost of goods sold on a widget will be X, so my gross profit will be Y minus my overhead will be my real net profit of Z.” You break it down like that.

Hear the call!

Download Dave’s show, commercial free, right here!

Podcast Dave’s show!

Dave Ramsey

(Pexels Photo)...
Dave Ramsey

Dave Ramsey says: Be smart – don’t raid nest egg to pay off mortgages

Being broke, even in a house that’s paid for, isn’t a good idea. Stand down on paying off your mortgages if it means raiding your nest egg.
5 days ago
(Pexels Photo)...
George Kamel

Selling your stuff online is the new garage sale

National Garage Sale Day is coming up. But we live in modern times though, and selling your unwanted stuff online can be way more profitable.
7 days ago
(Pexels Photo)...
Dave Ramsey

Dave Ramsey says: There’s too much risk when entering into debt to a parent

Money has a way of changing the family dynamic, and it’s almost never for the good. I would never tell you to go into debt to a parent as it might jeopardize your relationship.   
12 days ago
(Pexels Photo)...
Dave Ramsey

Dave Ramsey says: Help parents low on cash get financial counseling

Adult children who make good money should help parents in need, but only with the stipulation that they get financial counseling.
19 days ago
(Pexels Photo)...
Rachel Cruze

7 ways for you to have the best budget meeting ever

With skyrocketing prices everywhere you turn these days, it’s more important than ever to take control of your money by making and sticking to a monthly budget.
21 days ago
(Pexels Photo)...
Dave Ramsey

Dave Ramsey says: Debt consolidation is not a solution for credit woes

Debt consolidation companies try to position themselves that way, but they don’t even come close to addressing or solving the real problem.
26 days ago

Sponsored Articles

Day & Night Air Conditioning, Heating and Plumbing

Ways to prevent clogged drains and what to do if you’re too late

While there are a variety of ways to prevent clogged drains, it's equally as important to know what to do when you're already too late.
Sanderson Ford

Don’t let rising fuel prices stop you from traveling Arizona this summer

There's no better time to get out on the open road and see what the beautiful state of Arizona has to offer. But if the cost of gas is putting a cloud over your summer vacation plans, let Sanderson Ford help with their wide-range selection of electric vehicles.
Mayo Clinic Orthopedics and Sports Medicine

Why your student-athlete’s physical should be conducted by a sports medicine specialist

Dr. Anastasi from Mayo Clinic Orthopedics and Sports Medicine in Tempe answers some of the most common questions.
Are Business Budgets Like Personal Budgets?