Gosh, what happened to my budget?

Ah yes, there's planning and then there's operations.  Rarely do they coincide.  What to do?  This is one place where risk management comes in.

In an earlier post, I referred to a very large problem here in the Northwest caused by assuming past sales are a good predictor of future sales.  Utility planning's failure to address sales risk led to  literally billions in wasted money, money that could have been used to provide goods and service people wanted.  This was quite a spectacular event.  One result of that event was the creation of a new regional planning agency chartered by an act of Congress.  Another result was a change in forecasting methods that contributed to this spectacular failure.

How does a small business with little money for sophisticated resources and guidance navigate these waters?  One answer is to seek guidance from organizations like the Small Business Administration, USDA, and local and regional organizations established to provide technical assistance to such businesses.

There are some fairly simple methods that small businesses and start ups can use to try and at least narrow the amount of uncertainty they face.  One approach is to develop multiple budgets.  As was mentioned in an earlier post, it's often the case that a business oscillates between a conservative budget and a dream budget.  This can be 'modeled' using what's called a triangular risk distribution.

Here's the approach,
1. Make a judgment call about what you think your most shaky variable is in your budget (there are likely more than one).
2. For that variable, determine what you think the most conservative value is, what you think a typical - or average value is, and what you think a very optimistic value is.    
3. Build three budgets using the three values for what you consider the most risky element in your budget.

This is a very simple approach to do on your desktop in EXCEL.  You can easily expand from one to more variables, with not too much more complication using EXCEL.

Now, one very subjective element of this approach is your personal attitude towards risk.  What this means is different people have different reactions to risk.  This is what underlies portfolio recommendations by age with a younger person advised to hold a riskier portfolio than someone closer to retirement.

This doesn't need to get fancy.  When you've developed several different budgets, then step back and consider how you respond to risk.  If you're more conservative, you'll prefer the budget somewhere between the most conservative you could think of and what you considered your average or expected budget.  If you're more of a gambler, you'll prefer a budget somewhere between the expected budget and your aggressive one.  

While this can be made very complex, and there are models that use large amounts of data to include risk in making decisions, that's not what we're talking about here.  We don't want to go there.  Though, we also don't want to just develop one budget and assume life will in fact mirror that budget.  It will not.