Understanding Your Current Financial Situation
Itâs a common enough misconception - to think budgeting is like balancing a chequebook. Brings To Mind it appears to be such a dull and repetitive task that most people leave it to their accountants. The reality though is the opposite.
Understanding your current financial situation is not as mind-numbingly painful as youâd expect. It can be fairly simple if youâre honest with yourself and your business partners about what needs doing. And youâre willing to do whatâs necessary.
To me, this also means looking at where youâre overspending on things that may not matter much (like business cards) and investing in things that make a difference (like good design software). Or looking at ways to cut costs in one department, while putting more money into marketing for example. The complexity of understanding your financial situation comes when you arenât able to see the woods for the trees. It feels like thereâs so much riding on making the right decision, that itâs easier left alone till next week or next month even.
And all this time, you keep buying unnecessary things or spending more than necessary on items or services that can reportedly be found for cheaper elsewhere. In my experience, prioritising transparency in all areas of your business - including budgeting and accounting - puts everyone on the same page. This helps take some of the anxiety out of difficult conversations about why something was bought or what return on investment youâre seeing from something else.
Setting Clear Budgeting Goals
Business owners often get caught up in the wrong budgeting game, chasing after the idealistic idea that they must plan for every detail. Sure, most do realise that they must save and spend wisely, but it's common to get caught up in trying to make everything perfect. Such an approach creates unnecessary pressure and stress.
That's why it's important for business owners to set clear goals to stay accountable. How do you set budgeting goals that work. Always start with 'why'.
Sort of. Figure out what those numbers mean, how to break them down, and how these align with your business' future. For instance, if you find yourself thinking 'I want to make more money and save,' that's great â but it needs to be specific.
Instead try 'I want my business to earn X amount of money by June 2025'. It's far more realistic and achievable. Goal setting is slightly not a foolproof plan.
There'll be moments where you slip, miss a mark or set too big of a number. You might even forget the goal altogether. Don't be too hard on yourself if that happens.
Instead, reflect on why the misstep happened and re-evaluate your budgeting goals accordingly. Developing this attitude toward budgeting also makes it easier to break down goals into smaller ones, making it easier to keep track of accountability and consistency while helping business owners understand how their efforts directly impact their cash flow and success. Since budgets are important in ensuring you do more with less, setting clear goals prevents behaviour from slipping into territory that's 'too strict' or even 'too free'.
It keeps budgeting at a healthy rate that's focused on growth rather than overkill or burnout.
Prioritizing Essential Expenses
I think people get a bit panicked about whatâs âessentialâ in a budget. People tend to come at it as if theyâll be forced to give up everything nice, and end up just avoiding the task. Thereâs this guilt that comes with spending, and itâs made even harder by never knowing whether you can or canât afford something.
An essential cost is one that enables you to function comfortably and effectively in your daily life. It could be the rent you pay, the insurance premium on your car, your WiFi bill or even the fee for online classes you take. If removing it would affect your income or wellbeing, then it's probably essential and deserves to come first in your budget. But I understand not every expense is cut and dried - do pets count.
What about gifting money to family. Should I budget for emergencies. This is where needs and wants blur together. The truth is, most budgeting experts agree on including essentials in the budget before any other expense.
This helps you list out how much of your income must go into these ânon-negotiableâ costs and how much gets left behind for fun stuff or savings (or both). It also helps you assess if your income will suffice for all the essentials you need. For example, if youâre losing a lot of money on a house rent that leaves little for other necessary expenses such as groceries, transport or medical aid, maybe it's time to consider moving. Not every personâs âessentialsâ will look the same, either.
There are some non-negotiables like rent/mortgage payments, utility bills and groceries but after this base minimum of essentials - itâs really up to every individual/family unit how their priorities look like when it comes to spending money on monthly/annual expenses. There is no point building a budget that has no room for life itself so go ahead and book yourself that online yoga class or buy yourself some art supplies if those things make you feel more fulfilled at the end of a long workday.
Tracking and Analyzing Spending Habits
It seems like most people avoid analysing their spending habits out of fear. Looking at the numbers is daunting - and not as easy as you would expect it to be. Itâs like looking in the mirror after a wild night out. You wonât want to face yourself but you must.
Numbers donât lie, but our fears tend to be irrational, and so are the spending patterns that come from them. Once we take a few baby steps toward understanding those fears, we can start working on developing healthier habits. Youâre allowed to feel anxious about tracking every penny spent, but thereâs also the possibility that you will find some relief through it. Knowing how much you spend, and what you spend it on can often help you set monthly or yearly budgets that can lead to big savings in the long run.
Identifying patterns in how much money is being spent and saved each month can tell you a lot about your overall financial health. This can help you make investments with careful planning, reduce unnecessary expenses and even build towards a saving goal. Sometimes itâs not clear what the real numbers are behind your spending habits, it helps to break them down into small bits such as groceries, transportation, rent, eating out etc. Then creating a monthly spending diary will help reveal exactly how much of your money is being spent on each activity or item.
It might feel like too much work to do this every month, but once your finances are compartmentalised - it becomes easier to spot patterns and irregularities that need fixing. You could do this on a spreadsheet manually or let technology simplify it for you with budgeting apps and AI-based trackers. Understanding your spending habits can allow you to plan for big purchases without breaking the bank or compromising other expenses and commitments.
Implementing Cost-Cutting Strategies
Most folks seem to think that implementing cost-cutting strategies in business is about slashing expenses with brutal abandon. Throw the metaphorical baby out with the bathwater, and hope for the best. I Assume some organisations approach it a bit more thoughtfully - going through their budget line by line, identifying items that can be rationalised.
In my experience, when companies are seemingly forced to cut costs and have little guidance on what to cut, they often focus on things that make work more enjoyable. One of my favourite memories from my corporate days was working for a magazine company in Mumbai. In pre-pandemic times, we had all kinds of amenities at work - a napping room for late nights, a kitchen with healthy snacks (and wine), and regular after-work drinks on Fridays.
When Covid-19 threw the world off course and budgets needed to be checked, our CEO reassured us that jobs were safe, but some of those perks would be temporarily unavailable. And this trend seemed to reflect across other organisations. It seems like striking a balance between running a tight ship and creating a comfortable work environment is reportedly tricky - especially in industries like ours where stress is inevitable.
It makes sense to prioritise competitive salaries over complimentary snacks but itâs not an easy call to make. When it comes down to it, cost-cutting strategies should be based on what your team values most at work and how you can create an environment in which they will thrive. If it comes down to cutting perks or holding off on raises, transparent communication is key so your team knows whatâs happening and why itâs important for everyoneâs future at the company - including their own.
Reviewing and Adjusting Your Budget Regularly
I think most people have the wrong idea about budgeting. The general assumption is that itâs set and forget. But that's only part of the process.
You canât just build a budget at the beginning of every year, settle into it and then wait for it to auto-correct itself. It requires active reviews and adjustments along the way. The reality is, cash flow control will always be evolving - whether you like it or not.
There are simply too many variables you canât control. Sort of. Not to mention a slew of others that are so deeply ingrained in your business now, you wouldnât even think about cutting them down or changing them.
And there will be changes to staff, revenue and customer behaviour that impact your bottom line. This doesnât mean small businesses need to review their budgets every day. Because when youâre juggling as many hats as you do, you canât possibly keep up with everything all at once.
In my experience, reviewing your budgets at least once a quarter gives you enough time to make changes before anything gets out of hand. This allows for regular checks without breaking the momentum of how things are currently happening in your business. But this should go without saying - donât hold off on reviewing if there have been significant changes to spending.
Checking your budgeting from time to time also keeps you aware of whatâs really going on in your business and where most of your money is going. Sometimes you wonât be able to trim the fat on certain expenses, but regular reviews will help find alternatives for areas that could use some cost control down the line.