“Failing to plan is planning to fail.”
We’ve all heard that expression before. The fact that it’s a cliche doesn’t make it any less true. And nowhere does the expression hold truer than in matters of finance.
Planning in financial matters usually takes the form of budgeting. And while it’s a simple process, it’s amazing how many businesses, especially law firms, don’t do it. Not having a budget means you don’t have even a rough sketch of what your year will look like financially. It’s akin to taking a walk around town during rush hour with a blindfold on.
You may have a few questions. What are the benefits of budgeting in your small firm? What do you get out of it? And is it really worth it in a firm as small as mine? Continue reading below to find out some of the benefits of budgeting. We’re pretty convinced you’ll be persuaded that budgeting is a must, no matter the size of the firm.
Risk Management
Not having a budget is risky, and those risks can present in a number of different ways. Consider, for example, a sole proprietor who makes a large technology purchase on the first day of the month. She thought it was safe to do so because she had a lot of money in the operating account. But because she failed to budget she didn’t remember the fixed expenses she had coming up. Now she’s cash-poor at the worst possible time and is forced to borrow to cover the shortfall.
There are other risks involved with not budgeting. Some of them are obvious, like the example above, while others are more subtle:
Increasing debt or spending caused by a lack of budgetary discipline
A lack of financial strategy caused by the absence of a budget leads to inefficient operations
Cash-flow problems when the timing of expenses and revenues are less than ideal
Peace of Mind
By managing risks effectively, budgets can increase one’s peace of mind. Like the feeling of security created by having an effective bookkeeper looking after your books, a solid budget creates a sense of certainty and comfort.
While budgets are not set in stone (they are, after all, simply projected financial outcomes), the guideposts they create can serve to focus and clarify your thinking about money and finances. The added clarity usually creates additional peace of mind as the unknowns in your future become less nebulous.
Growth
Having a budget can help you create a clear path for growth. Without the numbers to back up your business strategy, you won’t know how much you can devote to investing in your firm’s future. You’ll be forever uncertain if you can really afford this purchase or that investment or if you need to save it for an unanticipated expense.
With a budget, however, you can be reasonably assured of how much you’ll need to cover expenses and how much is available to invest in additional resources.
Final Thoughts
Budgets aren’t the end-all, be-all of financial planning but they’re an excellent start. At the very least, they’re certainly an essential component of any complete financial strategy. A firm without a budget is one that should seriously consider investing the little bit of time it takes to draft some annual projections.