Too many small businesses work without a budget. And many small companies with budgets don’t get as much out of them as they could. We have seen it over and over again.
It’s not because the mechanics are hard to handle. Everyone knows the basics of how budgets work: You track the incoming money, you track the outgoing money and you do your best to plan for the future. In fact, the simplicity of this formula is what makes some small business owners consider budgets that are not worth the effort.
Therefore, what we are discussing here is not what budgeting means, because if you don’t already know, you can easily figure it out. We are more interested in why you should have a budget at all. Our proposal, to put it bluntly, is that budgeting is a way to enhance the creativity and adaptability that enable small businesses to be successful.
Reputation of budgets
You don’t become an entrepreneur because you have a burning love for spreadsheets. At least not ordinary. Being an entrepreneur doesn’t mean it’s about budgeting. It is not about scrolling through endless columns of variable costs or limiting spending. It’s about having the freedom to combine innovation and risk-taking with passion and expertise. It’s about removing barriers, not building them.
In view of this, small business owners often see budgets as a contrast to the real spirit of entrepreneurship. From this perspective, budgets are subject to overwhelming restrictions. They are artifacts of mmega-corporate culture developed by sticky people in windowless rooms with poor lighting. They may be necessary evils for extensive, inhumane conglomerates, but when it comes to organizations that rely on individual personalities and individual decisions, budgets are more burdensome than helpful.
One could say that the restrictions imposed by budgeting make small businesses less agile. Since agility is one of their main advantages over larger competitors, budgets reduce the competitiveness of small businesses.
That is the story.
Part of it is correct. For example, it is true that passion and innovation go hand in hand with entrepreneurship. It is true that small businesses should strive to turn their size into a competitive advantage. And it is true that budgeting for small businesses is very different from budgeting for colossal corporations.
What is not true is that budgets impose restrictions. Budgets don’t actually force anything. They only describe the restrictions that already exist. Perhaps more importantly, they describe a company’s ability to manage and even manipulate the constraints imposed on it by internal and external forces.
Restrictions and entrepreneurial creativity
If you are an entrepreneur, you are aware that your business does not operate in a vacuum. It is part of an amazingly complex system. For example, you have your relatively immediate concerns, like your employees and your local government. You also have your relatively big concerns, like government debt and foreign trade policy. No matter what, if you start a small business, you will be constrained by laws, regulations and inevitable economic realities, all of which will have a big impact on your way of working.
In other words, no small business starts in a position of unfettered freedom. The very conditions in which small businesses can exist also require a multitude of restrictions. Working capital, interest rates, minimum wage, a competitive minimum wage for professional employees – there are countless factors that limit what you can do and how much money you need.
You can acknowledge the reality of these factors, but if you don’t have a budget, you may not know exactly how they affect you. What specific limitations does a company face in your industry? Are there any that have a disproportionate impact on you due to the way your business works? Can you make changes to reduce their impact? Are there limitations that you are particularly productive with? Can you turn this productivity into an advantage over your competitors? Do you approach some limitations like everyone else, even if you could do a better job with them?