Budgeting for Growth
When it comes time for companies to plan for the future, many small business owners groan at the thought of preparing a budget. Budgets are an integral part of a business’s success. But what makes budgeting so important?
Budgets not only help your business prepare for the future, but they also uncover any unforeseen problems. Budgets help small businesses determine whether or not the have enough money to fund operations and expand the business. They serve as a road map of where your money will be going and how you will come up with the money if your business is lacking sufficient cash flow. Without a budget, businesses are in danger of spending too much money or even not spending enough money to let the business grow. Budgeting also helps you remain in control of your business by allocating resources to increase profits and performance. The list of benefits goes on and on but a budget will only work if it is properly planned and put to use.
Preparing a successful budget requires adequate planning. A huge benefit to creating a budget is that they help to identify and meet company objectives. You must not only decide what your objectives are, but coordinate your planning so they can be achieved within the budgeted period. After the objectives are identified, you need to decide what your budgeting cycle should be. Most businesses are on a one-year cycle but others choose to go on a quarterly or even a monthly basis. Different factors will influence the length of your budget period, including industry and existing business conditions. Whichever one you decide to use, you should allow yourself ample time to make sure your objectives and are clear for the next period.
You’ll also need to have previous financial information to help you accurately set your budget. You’ll need to rely on profit and loss statements, balance sheets with debits and credits, and cash flow forecasts to help identify likely costs and sales number. Instead of using previous and current performance records, some businesses choose to use zero-based budgeting that create a budget from scratch and requires all expenses to be justified. There are some benefits like lowering costs by avoiding estimated increases or decreases to budgets. However, it’s very time consuming and can be risky.
Although some business owners and managers don’t look forward to putting together a budget, they are essential to make sure that businesses have enough money to grow the business.