What is a budget?
A budget is a plan for the upcoming year or years. Usually, it is created by looking at previous financial periods and estimates for the upcoming year. A budget helps you to see if your goals are realistic, if costs are going to be too high, and to set your company up for success in the upcoming year.
Why is a budget essential?
- Keeps you from spending too much: A budget helps a company to have more disciplined spending. Instead of ending the month wondering why there’s nothing left in your bank account, a budget helps you to see what you can actually afford to spend and what income you need to generate to turn a profit. It can also help you to prioritize what’s most important to your company – if you need a higher marketing budget, you have to make a decision about what area can be decreased in order to keep your company profitable.
- Helps you plan ahead for slow months: Many companies are seasonal, they may be much busier in some months than others. A budget helps you to plan ahead for the slow months and relieve stress when your business isn’t generating as much revenue.
- Allows you to set & reach goals: A goal without a plan is just a wish – a budget is your plan to actually reach your company’s financial goals. If your goal is to double revenue, you need to enact a plan to get there. This may mean doubling your marketing budget as well, and accounting for the additional expenses the additional revenue will generate, like an increase in staff.
- Helps you evaluate company performance: Referring back to your budget throughout the year helps a company to evaluate whether or not they are on the right track and make changes accordingly. If a company is overspending, it is readily apparent when comparing your financials to your budget. If your revenue is lower than anticipated, it can help you to start looking for the root of the problem and correct it faster.
- Helps you obtain loans & funding: Detailed budgets show lenders or potential investors that you have a plan to make your business work. They may be scared away if they don’t see that you take your financial planning seriously.
- Helps you make informed decisions: When making important decisions like hiring staff or investing in equipment, a budget helps you to see whether or not a decision is realistic. Better to know before than after that you couldn’t afford to hire a new staff member!
- It helps you sleep better: Why toss & turn wondering whether or not you will be able to pay your bills this week, this month, next month, or next year? Setting a plan on paper allows you to take the uncertainty out of the equation since you have a realistic plan. You will know when you’re off track and you will know when you are doing well.
According to the Small Business Administration (SBA), about half of all small businesses fail within the first five years. A budget is one of the most important tools a company should use to help them become financially sound.
If a budget seems overwhelming to you, we are always happy to help! Helping small businesses succeed is our priority.