How Experience Impacts the Budgeting Process

By Kenneth Boyd, Lita Epstein, Mark P. Holtzman, Frimette Kass-Shraibman, Maire Loughran, Vijay S. Sampath, John A. Tracy, Tage C. Tracy, Jill Gilbert Welytok

Business owners with little experience in an industry often plan poorly, in part because they don’t have much personal history to go on. Also, some people have trouble accepting the reality of their business prospects. For example, they really want the business to grow 30 percent and can’t accept the fact that 10 percent is more realistic.

Consider three brothers who were opening a pizza-parlor franchise. The franchise was successful in other parts of the county. The brothers were opening a store in a new area of town. All good. None of the brothers had any restaurant industry experience. Two of the brothers sold business envelopes, and the third was a professional golfer. Not so good.

The brothers performed an analysis and determined that the profit margin was only 5 percent, barely enough to pay each of them a meager salary. They went forward with the business anyway. Perhaps they thought that 5 percent figure was wrong or that they could somehow increase it. Within a few years, the brothers closed the business.

If the brothers had experience in the pizza business, they probably wouldn’t have bought the parlor, or they would have at least had more realistic expectations.