How to Predict the Future, and Budget Appropriately
Most business owners recognize the need to have a budget. A good budget tells how much you can afford to spend, when you can make investments, and how much money you can take out of the business. Sound nice?
Too many people give up on budgeting because they are stumped: How can you possibly know what’s going to happen in the future? Well, you can’t know for sure, but you CAN still make a really useful budget. Here’s the magic formula:
Knowledge of the Past
+ Knowledge of the Present
= Assumptions about the Future
Let me explain each part. But first let me say–write this on paper (or a spreadsheet). If it’s in your head, it’s not a budget, it’s just a gut sense. Write it out and you’ll experience a new level of clarity and confidence around your finances!
As an example, we’ll use a personal trainer budgeting her revenue & expenses for next month.
Knowledge of the Past
The near future will not change THAT much from the recent past. For example, our personal trainer knows:
- Two months ago she brought in $6500, and last month she brought in $7000.
- Equipment costs have been around $300 a month.
Knowledge of the Present
Certain things happening today are likely to have future consequences. For example, our trainer knows:
- She’s currently talking to 5 new prospective clients.
- She plans to take one week of vacation next month.
- Her printer is on its last legs; it will need to be replaced soon.
Assumptions about the Future
Looking at what you know about past & present, make educated guesses about what might happen in the near future–we’ll call these “assumptions.” You’ll never know for sure, so go with your gut. By basing your budget on these written assumptions, you are saying, “If X, Y, and Z happen, then my budget is accurate.” And you will know, “If any of these don’t happen, I will need to revise my budget in that way.”
Some of the assumptions our trainer wrote down are:
- My existing client business will decline by $1000 because the summer is ending.
- Two prospects start training with me once a week, and one prospect starts with 2 sessions a week.
- I will have to spend $200 to replace my printer.
Why $1000 decline? Why 3 new clients? She doesn’t know for sure what will happen, but they feel like reasonable assumptions to her. So she’s writing them down and running with it.
Because you wrote down your assumptions, it will be easy down the line to check and see if your budget is going to be correct, or if it needs to be revised. Mid next month, look at the assumptions. If all of them are holding true, your budget is still on target! If some of them are not going to happen, no problem! Tweak the budget to account for the changed assumption.
Follow this process to create an estimate of your revenue and expenses for the upcoming month. Remember to write down your assumptions, on the same piece of paper or same computer file as you are putting the budget numbers. Enjoy the confidence that comes with a solid budget!
Mid next month, pull out your budget, and check the assumptions. Update the budget if needed.
Share your Insights
What have you found most helpful in putting together a budget? What challenges have you run into? Share your insights in the comments below!