With limited resources and time, it may be tempting to neglect a business budget and not follow through. The truth is many business owners underestimate the value of a well thought out budget in their business. Budgeting is an iterative process where you will undoubtedly hit roadblocks throughout. However, by setting up and revisiting your budget throughout the year, you will be on your roadmap to financial security. This article outlines the reasons why budgeting is important to business and explains how to go about it.

What is a budget?

Budgeting is the process of tracking the financial health of your business over a specific period of time. It provides a detailed picture of expenditures and revenues that can be used as the basis for significant business decisions. On top of the budget outlining your business’s financial and operational goals, it may also be used as an action plan that helps you decide where to allocate resources and how to evaluate performances.

Do I need a budget for my business?

The simple answer is: if you own a business, then you need a budget.

Small business owners just starting out may not see the benefit of a budget. However, the key to planning for your small business’s growth is sufficient funds for your plans. Without a budget, business owners run the risk of spending more money than it is taking in. On the other hand, you may be not spending enough money to ensure continued business growth.

Note: a detailed budget is a requirement for obtaining most business loans from financial institutions, as well as seeking equity funding from investors.

Therefore, it is worthwhile developing a budget early on to increase overall business efficiency.

Why is budgeting important to business?

A strategic budget serves as a roadmap for your business. It assists you in forecasting cash flow, identifying functional areas for improvement, and navigating your business to success. Successful organisations devote a significant amount of time and attention to developing realistic budgets as they are an efficient way to ensure the business is on track to meet its objectives. For new businesses, creating a budget can be intimidating because there are no previous figures to guide their budget estimates. However, with some estimates based on competitor performance and an understanding of the components of a budget, you can establish your first budget and be well-prepared for future budgets.

The Benefits of Budgeting:

  • Assistance with staffing: your business budget will allow you to identify whether you have the capacity to hire more employees; and if difficult, then where you will be able to cut costs for this added manpower.
  • Budgeting helps with evalutation: using a budget, within a particular fiscal year, you will be able to easily ascertain whether the business is operating profitably and therefore, pinpoint areas for improvement. In addition, a budget makes it easier to evaluate the feasibility of business opportunities and decisions.
  • Attract investors: investors’ confidence in your business will increase when they are able to see a thorough business budget. This allows them to easily understand how much the revenue the business anticipates bringing in and the costs incurred along the way. In addition, this demonstrates your committment to the businesses’ financial success.
  • Prepare for the unexpected: business owners can never account for 100% of business activities. Therefore, your budget should set aside funds in the event of an emergency, to ensure you won’t be utilising critical funds from key business operations.
  • Meet financial goals: a significant financial goal may include paying off debt. By following the budget and taking into account monthly/quarterly debt payments, your business should be able to pay off debts in a timely matter.
  • Well-prepared for tax time: whether you have a business accountant, or prepare business taxes yourself, having a budget can make the process run much more efficiently. Therefore, saving you both money and time.
Why is budgeting important to business

What should a budget include?

Developing and managing a budget is key to business growth. It does not need to be elaborate to be effective. You simply need to identify what you are likely to earn and spend within that budget period. To begin this process, ask yourself the following questions:

  1. What revenue is expected for the budget period? Be realistic. Overestimating will create an innacurate budget that is likely to have a domino effect on future business decisions.
  2. What does the business cash flow look like?
  3. What are the direct costs of sales? This includes the costs of materials, components, or subcontractors used to manufacture the product or provide the service?
  4. What are the overheads or fixed costs?
  5. What upcoming projects may impact financials?

Key components of a budget:

Furthermore, here is a breakdown of some key components to consider when creating your budget:

  • Estimated Revenue: this will be the amount of money you expect your business to receive from business activities. This will include selling products, investments , interest on savings, dividends etc. If your business has been operating for some time, then your previous revenue will guide you in estimating this component. On the other hand, a fairly new business, will need to check the revenue patterns of local businesses operating in the same industry, and use those figures to create an estimated revenue number. Nevertheless, remember to be realistic when estimating.
  • Fixed vs. Variable Expenses: this component can be categorised into two distinct groups – fixed expenses and variable expenses. Your fixed expenses will be the costs that stay the same from month to month (e.g., rent, salaries, insurance). In contrast, variable costs will include the costs of goods or services that can fluctuate each month in lign with business success. Some examples include: raw materials, comissions, packaging, bank fees, overdraft fees etc. When estimating variable costs you should align these with any expected expansion or growth in sales.
  • One-time Expenses: don’t forget to account for unexpected one-off expenses. These can include, purchasing a new monitor, replacing broken equipment etc.
  • Profit: the final component is profit, which is the amount remaining after you subtract expenses from revenue. Following this profit projection, you will be able to decide how much to invest in each functional area of your organisation.

Wrapping It Up

Once you have created a detailed budget, you should stick to it as much as possible. With the exception of reviewing and revising it as necessary. Using up to date budgets enables you to be flexible and also lets you manage your cash flow and identify what needs to be achieved in the next budgeting period. Regardless of what stage your business is in, it is critical to create and manage a budget. Your business will be able to plan for future growth and unexpected decline by setting a budget.

Are you looking for budgeting assistance for your business? BUSINESSNAV is here to help you stay on top of your finances, generate cash flow, and ultimately navigate your business to growth. If you have any questions or enquiries contact us using the form below: