What Are The Advantages Of A Long-Term Budget Vs. A Short-Term Budget?

What are the advantages of a long-term budget vs. a short-term budget? Long term business plans force businesses to develop discipline and planning skills. Five years is a long-term budget to me and the...

Five years is a long-term budget to me and the advantage is that it forces you into that discipline of thinking further out than this year. On a side note, I can tell you I've never really seen a good financial plan beyond two years. In other words, it really starts to loose credibility when you get out beyond two years, but that doesn't mean you shouldn't do it. It still forces you to think about what needs to be done today so that I can be achieving those revenues in four years or five years. However, there is usually so much change in the market place, things are so competitive that you really are going to have a hard time being a good predictor, but you will be prepared for at least the things you anticipate.

There may be things you didn't anticipate, but that's another matter. For example, if a client comes in to show me their plan and they are showing a flat 10% revenue growth five years in a row, I know they are just playing mathematical games. They really haven't backed that up. I ask them, "What is that 10% growth attributed to?" And they are going to say, "Well, more customers." I am going to say, "Where you are getting more customers from, why are your getting more customers, what are you doing different to increase your customer base?" So it's not just assuming that everything trends up and continues to grow. Some people really get burned badly because they haven't done the things you need to do, like being prepared for 2-3 years ahead.

Moving on to short-term budgets, we'll define that as a year. You don't want to budget any less than a year and I would recommend no less than two years. The problem with the one year budget is that it's difficult to say what you are going to do different to increase revenue. You can't just plug in 5% increasing revenue and assume it's going to happen because chances are it won't. You need to do the first year to see what you are because that's going to tell you how much money you may need to borrow, when you need to get things in stock, maybe when you need to add people to increase your revenue. All of those factors that contribute to making the business successful need to be thought through and put into that budget for the first year.

For the second year again depending on the business you might be a little looser with your planning. Let's use the example of the hot-dog stand again. He plans for the next year, he is probably not going to do a lot different unless he says I am going to franchise this thing and that a whole new level of budget planning to bring that about and make it happen. If it isn't planned, then most likely it won't happen.

If you are just starting out and you don't know how to anticipate the revenue and expenses of a business, you probably aren't ready. You need to know enough about the business forecast both revenue and expenses and if you don't know, then you have two options. One is to go work in that industry and learn about the critical factors that make it a success. If you don't want to do that, I suggest buying a franchise because a franchise will give you the financial data that you can use to project for the first few years.

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