How do I Know What's Going to Happen in the Future?

Small business owners, already mired in the day-to-day operations of their companies, throw up their hands when told they should maintain a budget. "But who knows what my sales are going to be? Insurance is on the rise, and I have no idea by how much,. How can I possibly plan 12 months into the future?".

The fact is, if you don't know where you're going, you won't know how to get there. A budget gives you a road map. You may end up on a different road, a but at least you've created the path.

A budget also gives you a dose of reality. If, for example, you want to move into new premises that will cost you an extra $20,000 in operating expenses per year, and you put that into your budget, you may find that you need to sell an extra 9,500 units of product to cover the increase in the expense. If your current sales structure cannot support an extra 9,500 units, you have big problems. It's better to find out before you move to the new location.

It's important to understand the difference between a budget and a cash-flow projection. Budgets generally encompass only revenues and expense items, whereas cash flows track all cash inflows and outflows: income, investments, loans, and repayments. A budget will be prepared on an accrual basis just as the income statement is, whereas the cash-flow projection will be on a cash basis.