Friday, November 30, 2012

Budgeting for entrepreneurs

In the early stages of a new business, entrepreneurs do not pay much attention to budgets.

Financial forecasts that estimate revenues and expenses are part of the business planning process.  But these are really just estimates, since so much is unknown about what will actually happen as the business begins to grow.  Because of this, it is impossible to develop accurate budgets.  Managing cash flow is a week-to-week or even day-to-day challenge that is a reaction to what bills need to get paid first based on what revenues have come in the door.

Budgets are based on history and experience in the business.  Budgets also require that a business has stable and predictable revenues.  So for most new businesses, the lack of any financial history and too much uncertainty about the future means that creating a budget is really not plausible

But over time, if all goes well, the revenues of the business will become more stable and predictable.  When this happens, it is a good time to start implementing the budgeting process.

While setting budgets may seem like a relatively simple process, it can profoundly impact on the culture of an entrepreneurial firm.

The culture in a start-up business is defined by the process of exploring and developing the business model that will bring the business success.  The culture tends to be based on informality and adaptability.  The early stages of most new ventures can best be described as “controlled chaos.”