For a small business, a budget (I prefer the annual plan) helps the owner determine where he/she is going and if the projected cash levels can support growth whether it's in the form of higher sales and/or infrastructure expansion.

But economics change quickly, so the plan should be updated regulary (I prefer monthly). Actual results should be compared to the plan and the plan updated through the next 12 to 18 months following each and every month.

Such a process provides the owner a level of financial intelligence that may be missing with a static plan that is only done annually.

If the above is too overwhelming, then consider a hybrid approach--stick with the annual budget/plan for all fixed costs and roll with a monthly revised plan for sales and COGs.

Rick Kadet

Vice President, Senior CFO Consultant, The Brenner Group, Inc.

Posted on May 25, 2011

Recommended by:
Paul Okrzesik

There is considerable value in having an annual budget and operating plan. I certainly would prepare a plan in writing and then a financial model to see what impact there is from your intentions. For example, if you see the need to increase inventories, the model will help you determine how much you can afford to do.

In a small business, you also need to forecast as conditions will change. The financial model will help do this. You still have your annual goal, but the forecast will tell you the things that need to change to get back on track. If you are not going to get back on track as conditions have changed in a material way, then back to the drawing board.

To allow your business to drift without a plan will doom you to slow or no growth and at risk from competitors. Get help from professionals with your planning; this will make a difference.

Paul Okrzesik

Sales

Posted on May 31, 2011

I love Rick's answer and agree with Mark as well. Let me add just a little more here.

An annual operating budget is more important to a small business versus a large business; because, not adhering to it can be fatal. So yes, having an operating budget is just as important as having a well written well thought out business plan.
That being said, adhering is another story. Large stable corporations and consumers with steady jobs come close to adhering to their budgets. Small business on the other hand always needs to have an emergency fund as things usually are in flux. So even though not adhering to the budget can be fatal - its going to happen!
What makes the difference in staying alive is in knowing exactly what happened and why you did not adhere to the budget and how straying can be prevented in the future. We want to smooth out those peaks and valleys in operations.