Benefits of a Budget
What is a budget?
Proper planning can mean the difference between success and failure for a small business. One of the most critical elements of the planning process is the creation of a business budget.
A budget is a financial spending plan that estimates income and expenses for a specific period. A budget allows a business to plan out expenses, reach business goals and anticipate operational changes. Business budgets should include every source of revenue, or income, anticipated by a firm along with all possible expenses the firm might have for a specified time period.
A budget helps your company operate within your financial means, manage unexpected challenges, and turn a profit. A proper budget will identify available capital, estimate expenditures, and anticipated revenues. Business owners should continually measure their forecasted budget figures against their actual financial results in order to determine where to make adjustments.
You should map out long-term needs into your budget. For example, if you anticipate a significant expenditure one or two years down the road for computer equipment, it’s a good idea to start budgeting in advance.
What should be included in a budget?
With a proper budget in place, a business can anticipate expenses, plan for major increases in costs and even make changes to the company depending on operational needs. A business can also set goals, communicate priorities and create reports for potential investors. Some of the items that a business should budget for include:
- Payroll: This can include everyone at the company, even the owner if they currently take a salary.
- Rent: Most companies lease an office, a warehouse, a brick-and-mortar location or other space where it conducts business.
- Utilities: Along with the lease of space comes utilities such as electricity, water, internet and phone.
- Insurance: Insurance may include general liability insurance, property insurance and coverage for unemployment and workers’ compensation.
- Professional services: A company may have expenses to keep the company operational. These can include IT services, printer repair expenses, a tax professional and even a cleaning team.
- Advertising: It’s common for a business to engage in some type of advertising to increase sales or brand awareness.
- Loans: A company may have loans it has to repay for opening the business, gaining capital from investors and other financial obligations.
Benefits of budgeting
An effective budget should track how a company is doing financially so it can plan for both short- and long-term expenses. It also allows a company to effectively share its process and budget with a third party, like a board of directors, or provide important updates to current or potential investors. Here are several reasons why budgeting is important for a successful business:
1. Being prepared for emergencies
Just like your personal life, you never know what your business life has in store so it’s important to plan for the unexpected. Having a budget allows you to set aside money for an unforeseen emergency so you don’t have to divert funds from another part of your business operations.
2. Attracting investors
Investors are attracted to a company that has its dollars well accounted for. A well-formed budget shows organization and a commitment to the business. An investor may have more confidence in investing in a business if their budget sheets clearly show expected revenues and expenses.
3. Setting sales goals
Some expenses are associated with having a sales team or sales processes, and the budget can account for these. It can also include how much sales you expect the business to earn in a certain timeframe. With these items in place, you can set sales goals that align with the budget, adjusting as needed later on.
4. Meeting financial goals
Every company should have financial goals that provide a gauge for how well the company performed for the year. Meeting these goals (or falling short) can mean the difference between making adjustments in your business or seeing a path for growth. Without a budget in place, a business may not have a good idea of how it’s doing until the end of the year, when it can be too late to realize you haven’t made a profit. A budget can keep a business and stakeholders on track to meet goals because there is a better awareness of where the money is coming in and where it is being spent.
5. Paying off debt
Paying off debt is a major benefit of having a budget. It should include line items for each expense, with current debt being just one of them. As long as a business follows the budget and accounts for the monthly or quarterly debt payments, then it should be able to pay the debt off promptly.
6. Easily preparing taxes
Whether you do business taxes yourself or hire a professional, a budget can make it easier to complete this process. Investing in software or hiring a pro can make your budget process faster and easier, potentially saving you money.
7. Making large financial decisions
Most businesses will be faced with decisions involving significant amounts of money, whether it be investing in equipment or adding to your staff. Having a budget helps you make necessary decisions like how much you can afford to pay in salaries, or if there’s an opportunity to increase operations.
Ultimately, a budget helps create financial stability. By tracking expenses and following a plan, a budget makes it easier for your company to pay bills on time, build an emergency fund, and save for major expenses. Overall, a budget puts a company on a stronger financial footing for both the day-to-day and the long term. Partner with us for more guidance on the budget process as well as how NextGen can help you shape your business’s financial future.