Why Business Budget Planning Is So Important
Planning, Control, and Performance Evaluation
A detailed and realistic budget is one of the most important tools for guiding your business. A budget provides essential information for operating within your means, managing unexpected challenges, and turning a profit. A proper budget will identify available capital, estimates expenditures, and anticipates revenues. Business owners must continually refer to their budget as a way of measuring performance against expectations.
Budgets enable a business to accurately set goals, priorities, and spending caps, and detail where funding originates and where new strategies might bring revenue into the company coffers. The line items that command the most funding and generate the most revenue are high-priority items. These items demand precise bookkeeping and serve as performance indicators of the overall businesses strategy.
An effective budget should break down revenue and anticipated expenses by month or by quarter, and depending on the size of your business, it should include separate budgets for each department. These departmental budgets should also be broken down by month or by quarter, and collectively they will come together to form your master budget.
Businesses that rely heavily on seasonal sales revenue serve as a good example of why a budget is so important. If the months of June, July, August, and December typically generate 75% of your business' revenue, your budget will allow you to plan ahead. Having a strategy for distributing your revenue most effectively over the course of a full fiscal year will help maximize profits.
Planning should account for long-term needs, as well. For example, if you anticipate a large expenditure one or two years down the road for computer upgrades or equipment maintenance, it's a good idea to start budgeting in advance.
In addition to being an important part of the planning process, budgets are necessary for evaluating the performance of your company over the course of each fiscal year. Part of budgeting responsibly is tracking actual revenue and expenses and comparing them to what was budgeted. This helps to assure that your business is sticking to its plans and offers an important means of identifying problems and opportunities.
For example, if sales in the first quarter are lower than what you budgeted, you'll know to find expenses to cut later in the fiscal year in order to stay profitable. A more positive example might be sales of a new product that exceed expectations. By tracking this trend and comparing it to what was budgeted, you have the additional revenue to perhaps revise the budget with plans to increase production or hire additional staff to handle the extra business.
A history of writing sound, detailed budgets and sticking to them can help show lenders or potential investors that you can develop a business plan and make it work. Lenders and investors certainly will want to dig deeply into your finances and history, but if they don't see evidence of strong budgeting practices, it might be enough of a red flag to turn them away.
If you're opening a new business and have little or no history, you need to make up for that lack of track record with detailed support for your budget. This means doing research into the marketplace and showing how past trends or, perhaps a void in the industry, supports the numbers you're presenting. This kind of attention to detail can help you gain serious consideration from lenders or investors.
Even small businesses with only a few employees need to make sure they're staffed properly for writing and maintaining a budget. If, for example, you own and operate a small cafe, you might have a unique menu and a reputation for quality customer service, but that doesn't mean you're a financial professional.
If hiring a full-time person to handle your books is not realistic, consider part-time help or working with an outside consulting firm, especially early on and annually when it comes time to write a new budget for the next fiscal year. SCORE, affiliated with the U.S. Small Business Administration, is made up largely of volunteers with backgrounds in business and finance who provide guidance and advice to small businesses. This can be a valuable resource when you're just getting started or when you're confronted with a significant challenge. In addition to helping with budgeting or other problems, it can put you in touch with other resources in your community.
Some of the best tools for writing a detailed budget and sticking to it are software programs, and they go beyond just Microsoft Excel or other spreadsheet programs. Companies like Quicken or You Need A Budget (YNAB) offer affordable software programs for budgeting and tracking revenue and expenses. As well, you already might be utilizing PayPal, Square, or other similar online services with your point-of-sale (POS) system, and like Quicken, they offer tools for writing a budget and tracking revenue and expenses.
You don't need a degree in finance to learn how to use these programs for your budgeting process, but it might be worth looking into taking a class to help master all of the relevant features they offer.