The Importance of Budgeting and Creating What-If Scenarios,

Backed by Neuroscience

by Sean Foster | February 28, 2023 | Cash Flow Management, Strategy

Budgeting, AKA: Planning, for Success.

In neuroscience, the concept of cognitive laziness is rooted in the brain's tendency to rely on well-established neural pathways and past experiences when making decisions. Our brains are wired to conserve energy, and as a result, we tend to rely on habitual responses to conserve mental energy.

Moreover, research has shown that our brains have a natural aversion to uncertainty and risk-taking, which can also limit our ability to think creatively. When faced with uncertainty, our brains tend to retreat to familiar patterns of thinking to reduce anxiety and discomfort.

Cognitive Laziness

If you are human, your anatomy works in this way. For a moment park that label you have given yourself: “I am a creative thinker”, “I thrive on uncertainty”; or “I am a risk-taker!”

This tendency towards cognitive laziness manifests itself in our failure, as business owners to create financial budgets. Without a budget, we tend to rely on past experiences or assumptions when making decisions about our business finances, and this limits our ability to adapt to unexpected events or in the making of informed decisions.

By creating a budget, you force yourself to think critically about your business's financial situation and to plan for different scenarios (how unpredictable the last few years have been!)

This process of planning and analysing can activate different parts of your brain, including the prefrontal cortex, which is associated with decision-making and problem-solving.

Creating What-if Scenarios

If you fail to create a budget, including ‘what-if’ scenarios, you will limit your creative thinking. You will likely fall back on habitual responses, or make decisions based on incomplete or inaccurate information.

When we create 'what-if' scenarios, we engage our prefrontal cortex, which is the part of our brain responsible for decision-making and problem-solving. This part of the brain is responsible for regulating our behaviour and emotions, and it plays a critical role in our ability to plan and make decisions. By activating our prefrontal cortex, we improve our ability to plan and make decisions and enhance our overall performance.

In fact, when I have managed to get ‘budget-allergic’ business owners to create their budgets, including ‘what-if’ scenarios, they always express their surprise at how enlightening and motivational the process is.

Budgeting will help you in setting priorities and in allocating your scarce resources effectively. It’s critical to identify areas where you can cut costs, such as reducing unnecessary expenses or optimising operations. Similarly, a budget will help you in identifying areas where you can further invest, such as marketing, skills or research and development.

Summing it up:

Setting up a financial budget together with ‘what-if’ scenarios should be considered essential for business success. This approach to business management is connected to neuroscience, as challenging ourselves to think 'outside of the box' will enhance our problem-solving and creative skills.

Additionally, your budget will help you in setting priorities, allocating resources effectively, establishing KPIs to track progress, and in identifying areas for improvement. By taking the time to develop a comprehensive budget, businesses can set themselves up for a far higher likelihood of success.

Next steps:

There are a plethora of free budgeting templates available. Your accounting programme, Excel and Google offer you a confusing choice. Confusion because there are so many options. This is why over the last 3 years we have been developing a simple format budget including ‘what-if’ scenarios in Google Sheets. And the good news is that this will be available within Sukuma in March 2023, but without the restrictions that Google Sheets inherently has.

Keen to know more?