Why Budget?

[wpowers11]

A budget is one of the more important parts of your business plan. When a company has its budgeting done right, management and supervisors can make sure they have the income coming in to offset expenses. A budget also makes it possible to plan for anticipated costs, like a large hire or a new piece of equipment, to continue operations. It also gives you the ability to be proactive vs. reactive.

A budget is a financial spending plan that estimates income and expenses for a specific period.

A budget allows a business to plan out expenses, reach business goals and anticipate operational changes.

Without a budget, a business may experience overspending and underperformance, which could ultimately lead to the company's closure.

What is a budget?

A budget is an estimation of expenses and income over a certain period, usually monthly, quarterly or yearly. It allows a business to plan out expenses, reach business goals and anticipate any operational changes as needed to support the business. A budget helps a business understand its operating costs and can be used to track performance.

Why budget is important

Most companies have several items they must pay consistently—daily, weekly, monthly, quarterly, yearly or otherwise—to maintain business operations. Budgets are important to ensure expenses are covered so the company can prevent any long-term debts. Without a budget, a business may experience any number of consequences, up to and including the dissolution of the company.

Some of the items that a business should budget for include:

Payroll: This can include everyone at the company, even the owner if they currently take a salary.

Rent: Most companies lease an office, a warehouse, a brick-and-mortar location or other space where it conducts business.

Utilities: Along with the lease of space comes utilities such as electricity, water, internet and phone.

Insurance: Insurance may include general liability insurance, property insurance and coverage for unemployment and workers' compensation.

Professional services: A company may have expenses to keep the company operational. These can include IT services, printer repair expenses, a tax professional and even a cleaning team.

Advertising: It's common for a business to engage in some type of advertising to increase sales or brand awareness. Advertising costs money and may very well be a regular expense that a company is responsible for.

Loans: A company may have loans it has to repay for opening the business, gaining capital from investors and other financial obligations.

Along with many other line items.

With a proper budget in place, a business can anticipate expenses, plan for major increases in costs and even make changes to the company depending on operational needs. A business can also set goals, communicate priorities and create reports for potential investors, all by having a budget.

Benefits of budgeting

An effective budget should give a business the tools to track how the company is doing financially so it can plan for both short- and long-term expenses for everything from new hires to the cost of expanding operations. It can also give a company the ability to share its process and budget with a governing body, like a board of directors, and provide important status updates to current and potential investors.

Here are several 7 reasons why budgeting is important for a successful business:

1. Being prepared for emergencies

You never know what can come up in the course of doing business, so just as it is in personal life, it's important to plan for the unexpected. A budget can help you set aside money in the event of an emergency so you don't have to divert funds from another part of business operations instead.

2. Attracting investors

Investors want to see that a company has its dollars accounted for. A well-formed budget shows organization and a commitment to the business. When an investor sees budget sheets and can understand how much money the company anticipates bringing in and what its expenses are, they may have more confidence in investing.

3. Setting sales goals

Some expenses are associated with having a sales team or sales processes, and the budget can account for these. It can also include how much sales you expect the business to earn in a certain timeframe. With these items in place, you can set sales goals that align with the budget, adjusting as needed later on.

4. Meeting financial goals

Every company should have financial goals that, if reached, mean the company did well for the year and can continue operations as normal or even expand as needed. Without a budget in place, a business may not know how operations are doing, but instead discover at the end of the year that it didn't turn a profit. A budget can keep a business and stakeholders on track to meet goals because there is a better awareness of where the money is coming in and being spent.

5. Paying off debt

Paying off debt is a major benefit of having a budget. It should include line items for each expense, with current debt being just one of them. As long as a business follows the budget and accounts for the monthly or quarterly debt payments, then it should be able to pay the debt off promptly.

6. Easily preparing taxes

Whether you do business taxes yourself or hire a professional, a budget can make it easier to complete this process. For example, you can invest in tax preparation software or have someone on retainer who can file taxes for you. Your budget will make their process go faster, potentially saving you money.

7. Making large financial decisions

Most businesses will be faced with large decisions that will impact the money moving into and out of the company. With a budget, you will likely find it easier to make necessary decisions like how much you can afford to increase salaries, if bonuses can be available for team members, what benefits you can offer employees or if there is the opportunity to increase operations.

Risks of not budgeting

Because budgeting is such a large and important part of business operations, failing to do so correctly can have negative results, including:

Not having an emergency fund

An inability to expand operations or expand into a new market

Not being able to secure investment dollars

Potentially shutting down the company because it can not get out of debt

Not making long-term commitments to customers, clients, vendors or suppliers, thereby straining business relationships

An inability to secure loans or to make a large purchase that's necessary for the business

Top job searches near you

Part time jobs

Full time jobs

Work from home jobs

Hiring immediately jobs

Budgeting can be a complicated process at first, but consider these tips to make it a little easier to create an effective budget:

Know industry standards

The best way to create a budget is to understand how much things cost in your industry. While every company can be different, there is usually a standard that you can start with, then adjust depending on your business needs and unique expenses and income.

Account for all income

To be able to form a well-constructed budget, you should account for all income. Having a process in place for assigning income to a budget category will ensure that everything you earn goes toward a specific part of the company. That way, it decreases the likelihood of your company spending more money than it should. If you find that your income is more than your expenses, that's great news. You may then not have a place to put the leftover funds, however, uncategorized income can go to an emergency fund.

Re-evaluate your budget

Consider looking at your budget at the end of each month. That's the time to compare your actual numbers to what you anticipated and estimated when you first created the budget. You can see how your performance was and then revise as needed so you remain as accurate as possible.

Consider long-term needs

Many business owners know what they must pay for in the future, especially if it's a major expense. For example, if a company's goal is to secure a government contract in two years, you'll probably need to budget for a big hiring expense or equipment upgrades to keep up with demands. Account for this in your budget early so you don't end up in debt to accommodate the expense or have to opt out of the opportunity altogether.

Invest in budgeting software

Budgeting software can help keep your budget free from human error. With the right software, you may find it easier to record business dollars and get a detailed report of how your budget is doing.

Overestimate expenses

There is no harm done if you overestimate expenses because doing so keeps you prepared for unanticipated expenses that otherwise might ruin your budget. Overestimating may also provide money that you can put back into the budget as an emergency fund or use it to pay expenses that may have been higher than expected for a period.  One of the biggest mistakes people make is underestimating their expenses. People sometimes say I can save here where they actually over spend.

Break down your budget

Depending on the size of the business, it may be helpful to break down the budget by department, providing each department with its own to follow. You can also break the budget down by month or quarter, which can be beneficial for those businesses that, for example, bring in a large amount of money over the summer months and less during the rest of the year. By breaking down your budget, you will be in a better position to plan for the slower months and get your summer income to stretch further.

In closing let me just quote a mentor of mine,Jim Abrahms, "Plan or be planned for." He taught us those that don't plan we'll buy them in a year at a reduced cost. Do you want a fire sale or a healthy ROI? only you can answer that question.