Proactive, Not Reactive: The Importance of a Budget
As small business owners know, it is hard to plan ahead. Budgeting is one tool to help forecast your financials so you are more prepared when the unexpected happens. Budgeting allows business owners to set objectives, notice trends and measure progress. Many small business budgets are simply estimated revenues and expenses. Complex budgets can incorporate seasonality, debt repayment, or any other issues important to the business owner. Even simple budgets allow owners anticipate peak periods, incorporate marketing efforts, and monitor the health of the business. Overall, a budget helps a business plan how to use the limited resources it has to accomplish its goals.
Incorporating business goals
All businesses have goals, and a good budget will incorporate the organizations future goals within the projected financials. This will communicate your priorities and keep your business on track. A goal to improve profit margin for example, would focus a budget on increasing revenues and decreasing costs over the year. It will provide an early warning system if your projections consistently fail to match actual numbers. For example, continually ask yourself questions such “Does my current pipeline reflect my anticipated revenues?” If not, then you can assess why there is a difference between the budget and actual revenues and adjust marketing efforts or inventory to match the budget.
These benchmarks provide feedback about the practicality and viability of business goals.
A budget should be realistic and incorporate the individual characteristics of the business. Planning for future growth is one of the biggest reasons for a budget. Budgets for growing businesses are particularly important because a budget will allow for expansions. This includes identifying growth opportunities. Budgeting can ensure companies have enough cash to expand business operations or to help pay liabilities during slower periods.
Maintaining budgets
One of the biggest mistakes small business owners can make is creating a budget for the next year and not looking at it again until the year is over. It is important to compare budgeted costs with actual costs both monthly and year to date. Business is fluid and dynamic, and your budget should be as well. It is not enough to just have a budget. As with any plan, you must continually update and adjust your budget as the year goes on. This will not only make your projections more accurate, but it will also keep you notified of the health of your company. Proactively measuring your progress will help control your spending as the year goes on, instead of reacting to unexpected results. Rising costs or a loss of major clients can be debilitating to a business without a budget. Once you are aware of the change, immediately refer to your budget to project how to move forward. How a business responds to surprises depends on the flexibility and planning of a company. A budget will strengthen a business’ operations and reduce risk.
Other uses for a budget
Budgets are also important for businesses looking for loans or seeking investors. A budget is a good indicator of the health of a company and investors will be interested in the projected financials. Many loans also require an up-to-date budget to ensure the business has enough cash to pay the loan payments. Businesses looking at merging or acquiring another company should also look at budgets to assess the health and value of a potential company.
Why don’t more businesses have budgets?
Unfortunately, many small businesses do not have a budget. Many owners believe a budget is too complicated, or don’t believe a budget will help. Another reason is business owners simply do not have enough time. These owners are so consumed with the day-to-day operations that managing the business is left undone. In these scenarios the business runs them, instead of the owners running the business. Managers who learn to create and maintain a budget have better flexibility and control of their company.
Articles for Further Reading
- Beesley, Caron. “How to Build and Use a Business Budget That’s Useful All Year Long.” U.S. Small Business Administration. 03 June 2013. http://www.sba.gov/community/blogs/how-build-and-use-business-budget-thats-useful-all-year-long
- Wuorio, Jeff. “8 Ways to Make a Budget Work”. Microsoft Business for Small & Midsize Companies. 2011 http://www.microsoft.com/business/en-us/resources/startups/budgeting-expenses/budgeting-for-business.aspx?fbid=PV9TiNf9VIQ
- Klein, Karen. “Better Business Through Budgeting.” Bloomberg Businessweek18 January 2006. http://www.businessweek.com/stories/2006-01-18/better-business-through-budgeting
