Budgets - Vital For Everyone
Budgets! What is your free cash flow?
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What is a budget?
It is your best guess on what you will earn and what you will spend over a defined period of time. Everyone should budget including individuals, groups of people, business and anyone who earns and spends money.
Key things to note in preparing a budget:
Don’t overthink the budget process. The day after you prepare it, the assumptions and numbers will have changed.
A budget is an estimate of what might happen over a period of time. It should provide you with a guide as to what might happen - it is not an exact science.
Make sure you compare the budget to your actual result on a regular basis.
You should review and update your assumptions - but not too often and only when there is a material (~20%) change.
Your assumptions must be based on a realistic view of the future. A good guide to this is what has happened in the past and known changes in the future.
Test your assumptions (not necessarily the numbers) with friends and colleagues.
The key goal is to determine your free cash flow. This is what is left over at the end.
Allow for low and high months for your expenses - you don’t tend to spend the same amount every month, especially when considering holidays, asset purchases and annual expenses.
Test your budget with various scenarios of what might happen to change your income or expenses - illness, unexpected costs, loss of income or increased interest rates.
Work out what your needs and wants are in terms of costs. This will help you if you need to makes cuts in your budget - the “wants” get cut off first…..
Deficits or losses for the short term are OK.
It is not complicated and a good software package can help - when in doubt, Excel is great.
The most important thing is to have a go and start a budget. You will be surprised at how much you will save by just knowing how much (and on what) you spend on a daily, weekly and monthly basis.
James