To budget, or not to budget, that is the question:
Whether 'tis Nobler in the mind to suffer
The Slings and Arrows of outrageous Fortune,
Or to take Arms against a Sea of troubles…
I like using quotes, and this one seemed perfect for a little editing to introduce this piece.
Many people stress the importance of budgeting to small businesses, but rarely does anyone take the time to explain why it’s important. There have been countless videos and tutorials created to show people how to make a budget, but rarely do they examine what makes a budget vital to operations. If you take only one thing away from this blog post, it should be this:
A budget provides direction.
Well-prepared budgets provide this direction through a careful consideration of cash income and use. This oversight allows decisions to be made based on an honest assessment of a businesses’ financial situation, and not the scattershot approach of guesswork and gut feeling. Actual monitoring of the budget also allows a business owner to determine where he or she is on the path to a series of static goals, and to adjust business operations accordingly.
There are numerous benefits to the direction that comes from budgeting, more than could be summed up in a blog post of reasonable length, but I only intend to discuss four of the most important.
1. Long-term goals
A budget converts the concept of “growth” (or “stability”) into a figure, usually as a year-end goal. With this number in mind, the focus of the business becomes reaching that goal, moving business operations out of the day-to-day and placing them within a longer timeframe. The firm uses the budget to conduct itself in a forward-looking manner, keeping income goals, savings, and progress at the forefront of all decisions. When a business owner begins to think of operations with a longer view than simply having money for payroll at the end of the week, it becomes possible to discuss building a structure that will last 5, 10, 15 – even 50 or more years into the future. This makes budgeting particularly useful for business owners with children who would like to see their sons or daughters inherit the practice in the future.
2. Money Controls
The money controls inherent in budgets clamp down on impulse buys, eliminating unnecessary purchases.
When prepared correctly, a budget shows the business owner what money is available, and what is already committed. Knowledge of where your business is in relation to its goals allows you to more effectively address and plan for purchases. It seems boring to budget when XYZ Engineering across town just bought a dozen of the most current AutoZZZ subscriptions that have that cool new 3D modeler, but when your firm updates in 6 months, you won’t need to worry about a cloud of debt hanging over your head. And if XYZ Engineering put that purchase on a credit card, they also have to worry about interest payments that you don’t.
3. Examination of Expenses
Nobody is perfect. We all have expenses for services we don’t use that often. I had a gym membership for years that I only used maybe once every two months. After creating a budget, some clients find that they have duplicate subscriptions for services that they didn’t even know about.
When you budget for a business, it allows you to see where you can cut expenses. You may find that you’d forgotten your phone system is designed with 50 employees in mind, but all you have are 20. Are you going to grow fast enough that you’ll need those 30 extra lines immediately, or could you downsize and add lines as they become necessary? A budget gives you the information you need to make these decisions.
4. Anticipation
This is another key benefit of budgeting. When a business owner knows how much money is coming in and how much is going out, he or she can be ready for just about anything. Knowledge of cash flows allows a firm to set aside money in the good times and monitor the outflow of savings in the bad times to ensure that a business weathers the storm. Being prepared for a recession helps to soften or eliminate the pains that go along with it.
In addition, being prepared means looking ahead to anticipate future expenses, which goes hand-in-hand with money controls. How long will that old printer last? When can the office afford to upgrade all its computers? Do we have the money to hire another draftsman to increase output? A company with a well-prepared budget won’t need to use any guesswork or “sign-and-pray” checking because a budget plans for the future and gives business owners the flexibility to pay for both expected and unexpected expenses.
Budgeting can be intimidating at first. It requires a significant investment of time and energy to obtain the necessary information, analyze it, organize it, and then use that information to create a plan for financial success. It also necessitates a set of up-to-date books that are fully reconciled to create an accurate picture of where the company is in relation to where it needs to go. I can create a budget for any business that produces results. If you have a bookkeeper on staff, or someone you use already for your bookkeeping needs, ask them today about budgeting and where they can take your business. You’ll be glad you did.