The word budget comes with all sorts of connotations – whether it is the Federal Government Budget that comes out every May, your business’ budget due at the end of the financial year, or perhaps your own personal one, budgets can feel restrictive and limited.
We want to turn your thinking around, so a business budget becomes this invaluable foundation to your business’ success.
Imagine budgeting as the road to your future – a budget will drive your business, provide you and management with the invaluable information you need to navigate the road ahead within your means, handle any problems as they come along so you safely arrive at your destination having made a profit.
Whether your business is booming, or your small business is running on a shoestring, budgeting is a powerful tool that can set you free from angst and let you fly to success.
If you are a startup, a budget can help you set goals and assess the validity of your business concept. Alternatively, a budget for an established business can give a snapshot of its performance and help you identify possible future investments.
What is a business budget?
In the same format as the financial year, a business budget is made up of two types of budgets:
– An operating budget displays your business’ income-generating activities, including revenues and expenses. This can be broken down into quarters, even months or weeks, depending on the cyclical nature of your business. This budget should be prepared first.
– The financial budget shows the inflow and outflow of cash and other elements of the business’ financial position.
Every business has certain obligations to meet such as payroll, rent, loan repayments, or insurance premiums – not having enough money to pay for any of its expenses leaves the company in a vulnerable position. Budgeting isn’t an easy task but well worth the effort and time it takes.
Why is a business budget so important?
Besides, seeing all your expenses and revenues for the year in one neat report, a budget is a powerful tool that has so many other benefits:
It provides a greater ability to make continuous improvement and anticipate problems
A budget allows the business to constantly keep a check on income revenues and expenses.
When presented in a budget type format, it makes it easier to see where opportunities lie, areas for improvement and see if there are openings to spend capital to grow the business.
In times of small, or even shifting changes to your revenues or expenses, your business budget can be used to make the necessary adjustments to the financials.
In times of downfall, the budget can be used to counteract the issue by cutting spending in certain areas or increasing the revenue for another area of the business. In times of prosperity, the budget can be altered to seize the momentum these opportunities bring with them.
Over the years, you have time to build a strong financial story, focus on the movements in income and expenses and use small adjustments to advance the health of your business and stay commercially competitive.
When you have a budget and follow it, you can relax knowing that you have a buffer – to sustain your business through downfalls and to seize opportunities.
It creates sound financial information on which to base decisions
The advantages of budgeting in a business include the ability to follow management strategy for improving market share, earning a profit or increasing current profits.
Having the facts when you make big or even subtle business decisions is important and will not only help you make the right one but will give you more confidence in your decision-making. Your business decisions can now be backed with facts and figures with your hunches.
A well-communicated budget helps everyone understand the priorities and gives valued background to business strategy. Business owners should help employees understand the strategy and how those priorities are funded by the annual budget.
In the field
For example, when our client, a food manufacturer, wanted to develop a new food product line as part of its business strategy, the budget was used to allocate money to the project. All managers knew the total spend allocated for research, development and marketing so that everyone involved in the process could support the product launch.
A budget is very important when there are changes in the sales revenue for a product or service. Each product or service has certain direct and indirect costs and the price you charge your customers for it must more than cover these costs to make a profit.
If you can see sales for this product line are falling, you can alter the direct and indirect costs immediately to control your bottom line. You may not reorder stock for this product, you may change your advertising for this line, alter staffing levels or you may reduce the price you charge for this product.
Your actions can have a flow on effect and a budget helps you react faster and makes it easier to see what action to take.
It gives improved clarity and focus of business finances
A budget gives you a bigger picture of your business’ performance, and with this comes a clearer short-term view for long-term planning.
Crunching the numbers is far simpler and business owners who treat their budgets with the same care as the rest of their business will be the ones to prosper.
The budget makes it much easier to pick up on errors by comparing the expected total in the budget with the actuals. If the budget for an expense is different to the actual amount, this was then investigated to check why the difference and errors could be quickly found and rectified.
It can raise awareness of external forces that may affect your budgeting
It is important to understand the risks of your organisation and its industry. For example, if you operate in an industry that is significantly seasonal in nature, you will likely need to break down your annual budget into a monthly, or even weekly, approach.
Seasonal businesses, ones that make the bulk of their sales in a particular period of the year, may need to prepare budgets on a more regular basis to ensure expenses are met during the whole year from the bulk of the revenue that comes in at a certain time of the year.
You should be aware of impending changes in regulations, such as award minimum wages, health care changes and the introduction of new tax laws and plan for them accordingly.
If you plan to expand operations and apply for financing, your bank manager will request your future budget projections. Likewise, if your business plan includes applying for federal grant money, then budgeting is a necessary part of the government application. What’s the one thing holding back your business budgeting?
Time. The process can take on a life of its own, with unsurmountable administrative burdens and rapid change making the budget unreliable.