Top Four Reasons Your Small Business Needs a Budget
We are rapidly approaching the end of the year and while tax planning is top of mind in our firm, we also believe that having a budget developed for next year is critical. Why is a budget so important? Well, let’s dive in and take a look.
First of all, what is a budget?
It’s really simple. A budget is a plan that estimates income and expenses for a specific period. That can be done at any interval, but is most commonly broken down into monthly, quarterly and annual. This budget can then be used to compare with actual income and expenses for the period and help track performance of the business.
Why is a budget important? Our top four:
It helps set goals
When we budget, we have to think critically about our business and where we want it to go. Having a strategic direction and then creating an annual plan that aligns with that direction is part of the budgeting process. Think of a cruise ship in the Caribbean – the captain just doesn’t sail around without a plan. The captain has a distinct destination in mind, accounts for conditions along the way and then charts a course. If you don’t know where you are going, how will you know when you get there?
It helps set priorities
Let’s say you wanted to increase your revenue by 50% in the next year. Setting this down as a budget will require some thought as to how you get there. Your business might increase by 5% without much additional action but think about what is needed for 50% growth. You might need to hire more people, you might need to increase your marketing spend or you might even need to get a bigger office. That is what I mean by setting priorities. When we start with revenue, that helps us think about what else we need to do in our business to achieve that goal.
It can help with financing
If you want to attract money to invest in your business from outside sources, chances are the investor or bank will want to see a plan. This demonstrates that you as a business owner are carefully planning the details of your company as well as showing them the results that can support a return on investment.
It can help control expenses
Being a small business owner comes with a lot of challenges. Keeping an eye on all of the expenses of your business can be difficult. By setting expectations of where expenses will be in the next year, we can easily see where expenses deviate from those expectations. Those variances don’t always come from necessary and unavoidable increases. In our business clients, we find numerous cases where expenses are being charged for things that were not needed, or pricing changed with a vendor that isn’t according to contract terms. Budget to actual variances bring these issues to light very easily.
How do I get started
Start with revenue! That is the most important number to work on first as a lot of expenses may fluctuate with revenue. You could use a percentage increase or do a monthly plan for a more seasonal business. Then, start with your biggest expenses. How will they move relative to your revenue assumptions? For the smaller expenses, you might consider simple percentage increases or calculate the new number as a percentage of revenue. These are just some basic tips but can get you started.
We strongly believe that the time invested in creating a budget is worth it. Creating this budget requires you to have certain assumptions. It is rare indeed that these assumptions actually match reality, but developing these assumptions and challenging them adds value to your strategic planning process and may very well increase your profitability based on the factors mentioned above.
If you would like to discuss setting up your budget, feel free to give us a call for further information.