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Get Thee To A Budget

It's no secret that the vast majority of new business owners don't bother to set budgets, instead relying on their accountants to tell them at the end of the year whether or not they made any money. Now research from the Stanford University Graduate School of Business begins to show just how misguided that approach can be.

Professors Antonio Davila and George Foster examined 78 small West Coast companies established in the 1990s to determine if those with formal operating budgets performed any differently from those without. In an October, 2004, working paper, the researchers found that businesses with a budget in place by their second year had higher revenues than those that instituted one later in their history. The early budgeters were far more successful than those who never got a budget in place.

The difference between the planners and the ad-libbers is sizable. By the fifth year of operations, revenues were more than 200% greater for the early budget adopters. Among the companies that went public or received venture funding -- 60 in all -- early adopters had an average valuation of $157 million, compared with $43.4 million for latecomers and only $13.6 million for those who never got around to making a budget.

The exception: new consulting businesses. Budgeting and planning weren't so important to them, since they tended to have strong cash flow and not many startup costs. The successful ones usually had clients lined up before opening their doors.

While the results don't prove a direct correlation, "being organized and having the right information helps performance," says Davila. Now we have the numbers to help show it.

By James Mehring

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