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 and providing the information necessary to operate within your means, handle upcoming challenges, and ultimately turn a profit. Without a budget, it can be like shooting in the dark. A solid budget identifies currently available capital, estimates expenditures, and anticipates revenues. You should continually refer to your business' budget as a way of measuring performance against expectations.
A budget is a planning tool necessary for building a framework for your business and its finances. Combining past trends with realistic forecasts for the fiscal year, a budget provides a detailed view of assets, realistic revenue expectations, and how those balance against your anticipated expenses.
Budgets also help with setting goals and establishing priorities. A budget should detail where funding will come from to execute new strategies and how much revenue that can be generated by executing the strategies successfully. The line items that command the most funding or generate the most revenue typically are high-priority items, and that can serve as a good reminder of your overall strategy when making decisions.
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 also should 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 percent of your business' revenue, your budget allows you to plan ahead so that you'll have the best strategy for distributing that revenue most effectively over the course of a full fiscal year.
Planning also should account for long-term needs. For example, if you anticipate a large expenditure one or two years down the road for computer upgrades, it's a good idea to start budgeting for that expense 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 the 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, but budgeting also 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 that you likely will have 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'll know 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 know how to develop a business plan and make it work. Lenders and investors certainly will want to dig much more deeply into your finances and history, but if they don't see evidence of strong budgeting practices, that might be enough of a red flag to turn them away.
If you are opening a new business and have little or no history, you need to make up for that lack of a 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 are 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 are 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 are 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 are just getting started or when you are 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 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.