Why Having a Budget Matters To Your Business
Starting a business is hard. In fact, most businesses that start today won’t make it. The reasons why businesses fail is as varied as the types of businesses themselves. However, one of the main reasons isn’t due to a lack of experience or poor management. Often, businesses fail because of poor financial decisions or a lack of cash flow.
Why It Matters
Once your businesses is off the ground, how you manage your finances is vital to its continued success and growth. Sure, everyone knows that a budget is important, but how important is it really?
In short: Roughly 60% of small businesses cease operating in the first 3 years of trading. The number one reason is typically running out of cash. This is where having a budget comes into play and why it is vital to your business’ health.
What a Budget Does For You
A budget is more than just a method for forecasting income and expenses. Sure, it does that too. However, a proper budget helps you to allocate funds where they’re needed, track performance, and forecast your cash requirements months in advance.
A budget doesn’t have to be complicated, but it should include three basic elements:
- Projected Sales. This can be the most difficult to assess. If you’ve been in business for a while, look to past performance as an indicator. If you’re just starting out, your business plan should include sales projections. It’s important to be honest, even if you have to go conservative on the projections. Over-estimating your sales will throw everything off. When in doubt, play it safe but be realistic.
- Direst Cost of Sales. These are the costs associated with your products or services. Materials, manufacturing, outside vendors, direct labour costs etc. Any costs that are directly associated with the manufacture of your product or the provision of your service.
- Indirect Costs. These are business costs that do not change with the fluctuation of your sales, such as rent, insurance, indirect labour costs etc. Any costs that are not directly associated with the production of products or the provision of services.
Once you have the above information, it is also important to break down your costs and identify each one. This helps to segment your costs and may enable you to determine ways to cut expenses and improve your financial performance.
Budgeting Next Steps
It’s important to review your actual performance against budget regularly so that you can see if you are on the right track, or if adjustments need to be made. Your budget should serve as a target for your business’ performance, as well as to help you to manage your operational expenditures.
Compare your budget with past performance to see how your business is growing and to establish the reasonableness of your budget.
You can create and manage your budget on your own, using accounting software, or in conjunction with your management team. If you have a CFO, financial controller, or a financial manager onboard it is probably best to let them do the heavy lifting!
Past, Present, and Future
The budgeting process help any business to see where they’ve come from, where they are now, and in what direction they are heading. They help businesses stay on the right track and provide a helpful resource to refer to when needed.
What’s more, it can be shocking how many businesses do not think a budget is necessary. By taking the opposite approach, you can find yourself in a better position to navigate your business going forward. It’s a must for business success.