Building a Better Small Business Budget
The Situation
2023 is right around the corner and new challenges and uncertainties continue to emerge. Planning is beginning to feel like a deranged game of whack-a-mole. To build a budget and plan for the new year (or at least next week), you’ve got to make predictions, but any stance you take will result in a drastically different strategy. The stakes feel high because they are high.
The Play
Make your budgeting as dynamic as possible. That is, focus on creating a budget that’s easily updated, adaptable to changing circumstances, and able to accommodate a wide range of inputs, while still generating actionable, useful information.
Breaking down uncertainty:
What are the most meaningful contributors to your business?
How much have they historically changed?
How do they influence each other?
Compare budgeted key assumptions against past performance and volatility.
Tinker.
Prepare to pivot.
Go Long
New Essay: Build a Better Small Business Budget for 2023
“2023 strikes us as a year when every business, large or small, struggling or booming, should have a thoughtful outline to keep on top of performance and understand where there might be risks to or opportunities for the bottom line.”
Video Explainer: How to Build a Better Small Biz Budget
The only thing you know for sure about your company's budget is that it's going to be wrong. So what will you do? Permanent Equity CFO Tim Hanson walks us through some of his favorite budgeting tools and why it's important to know if your budget is Optimistic, Reasonable, or Pessimistic.
Throwback: Build a Better Small Business Budget
In which we discuss how to make a budget that’s, above all, realistic, simple, dynamic, logical, and useful. AND, how a good budget is really just a good communication tool.
Hypothetical Small Services Business LLC Budget
Download a copy of the simple budget for Hypothetical Small Services Business LLC to play around with the numbers.
Go Deep
Curiosity sparked? We've put together a list of resources on small business budgeting, managing volatility, and adapting to changing circumstances.
Finance for Nonfinancial Managers (Gene Siciliano)
+A guide for the rest of us on reading and understanding financial reports and using that information to make better, more informed decisions. “Regardless of your path, your career success depends on doing [financial] things reasonably well, and you cannot do that without a respectable knowledge of finance and accounting. Notice I didn’t say a thorough knowledge and I didn’t say you need to understand how accountants process detailed information. I didn’t even say you had to get it right every time, because accountants don’t, either. But you do need to be comfortable talking the language of finance at the nontechnical level so that you can communicate effectively in either direction.”
Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts (Annie Duke)
+How to optimize decision-making for long-term success in a world full of uncertainty, emotion, biases, and dumb luck. “Over time, those world-class poker players taught me to understand what a bet really is: a decision about an uncertain future. The implications of treating decisions as bets made it possible for me to find learning opportunities in uncertain environments. Treating decisions as bets, I discovered, helped me avoid common decision traps, learn from results in a more rational way, and keep emotions out of the process as much as possible.”
The Base Rate Book: Integrating the Past to Better Anticipate the Future (Michael Mauboussin)
+A tangible guide to forecasting that combines evidence based on experience (the inside view) with outcomes of relevant reference classes and base rates (the outside view) to build better predictions. “If the outside view is so useful, why do so few forecasters use it? There are a couple of reasons. Integrating the outside view means less reliance on the inside view. We are reluctant to place less weight on the inside view because it reflects the information we have gathered from our experience.”
On the Psychology of Prediction (Daniel Kahneman and Amos Tversky)
+More on why we predict the way we do (poorly). Specifically, we use representativeness to make intuitive predictions, meaning we select outcomes based on the degree to which they represent essential features of the evidence. “In making predictions and judgments under uncertainty, people do not appear to follow the calculus of chance or the statistical theory of prediction. Instead, they rely on a limited number of heuristics which sometimes yield reasonable judgments and sometimes lead to severe and systematic errors.” Or, “Evidently, statistical training alone does not change fundamental intuitions about uncertainty.”
Predicting the Future Is Possible. “Superforecasters” Know How. (The Ezra Klein Show)
+If this is you, hit us up. “Virtually every consequential thing we do in the world is an implicit forecast because we’re making assumptions about what will follow later. Sometimes those assumptions are so obvious we don’t even think of them as a forecast – we think of them as virtually factual – but [policies are] competing forecasts about what will happen with respect to inflation, inequality, government deficits, a long list of outcome variables that people are arguing about.”
