The Importance of Budgeting when Running a Company

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It takes more than just a vision to achieve success as a business owner. You have to achieve your company’s objectives through executing a solid plan – a plan that involves a detailed budget for your  entire operation.

It’s easier said than done for most people. Budgeting requires extensive research and analysis of industry trends, financial forecasts, and the risks associated with your chosen business. It also must be compatible with your operational strategies and the resources you have at your disposal.

Given how overwhelming the planning process can be, plenty of inexperienced business owners overlook the importance of sound financial planning and controls in their business.

To keep you from making the same mistake, below we’ll discuss the significant importance of budgeting for your business – and why you should prepare, review, and analyse your budget as much as you can.

Business Budget 101

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A budget is all about planning and, specifically, planning your business’ financial future.

It involves looking closely the current capital of your business, while working out its fixed costs, variable expenses, one-time fees, cash flow and projected revenues. Once you consider all this, you’ll be able to estimate the overall profitability of your operations.

If you’ve been running your business for quite some time, your budget will probably consist of a comprehensive historical account of your company’s income and expenses, along with its projections for the upcoming fiscal period. Management will use this information to analyse the company’s business performance and make informed decisions on their subsequent direction, mandates, and strategies.

Types of business budgets

There are different types of business budgets. Below are some of the most common examples.

Master Budget

This refers to the all budgets you have combined from the different aspects of your company operations. You use this in planning the initiatives allowing you to reach your organisational goals.

Operating Budget

You use this type of budget to verify if the company’s expenditures fit appropriately within its overall strategic plans. Most businesses prepare this at the start of the year and then evaluate it periodically as part of the business review process.

Static Budget

Some entrepreneurs rely on this budget to set financial KPIs regardless of how the business will earn or spend. It consists of all the fixed business expenses for a given year.

Labour Budget

If you intend to recruit new people to join your team, a labour budget is necessary to ensure that you have sufficient staffing provisions to achieve your targets.

Small business owners usually rely on spreadsheets to create and maintain their budgets. However, as the organisation grows, it can be hard to keep track of everything without the aid of budgeting software.

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Why You Should Spend Time and Effort on Your Budget

Given all the different kinds of budgets, the benefits of having a proper business budget include but are not limited to:

  • Enhancing your ability to manage the finances of your business;
  • Ensuring that you have enough funds for your current commitments and future projects;
  • Increasing your confidence in your business decisions;
  • Attracting potential investors who can contribute to the growth of your company; and
  • Providing a structure on which you can monitor your operational performance and progress towards your business objectives.

As you can see, the budget is one of the cornerstones of a successful business. No business plan is complete without one, and you’d likely find yourself going in circles and making expensive mistakes in its absence.

Moreover, budgets play a significant role in securing loans for the expansion or continued operations of the business. In general, banks and other moneylending institutions require business owners to submit a detailed account of their finances and history. One of their objectives for doing so is to examine if an applicant for a loan knows how to create and stick to the budget.

Without this, your chances of getting approved will be pretty slim because they will likely feel uncertain about whether or not you can pay back the loan.

How Budget Monitoring Can Boost Your Overall Performance

You might be assuming that the budget only affects the financial aspects of your business. But that’s not the case if you utilise this tool to measure and evaluate the company’s performance over an entire fiscal year.

The budget and its review versus the actual income and expenses will influence the following areas of your business:

It can shape your sales and marketing strategy

By looking into the budget versus revenues, you may gain insights into the business’s market potential and profitability.

This can guide you into allocating more resources to a particular product or service. Your budget analysis may also shape your selling strategies and marketing efforts.

It can help you streamline your supply chain

Through budget reviews, you will have the chance to find out how your suppliers’ prices are affecting your bottom line. If you have a pre-determined budget for such expenses, you can easily highlight when certain parts of your supply chain go beyond your limit. This will give you a heads up to look for other vendors or service providers.

For example, your budget analysis may reveal that your current logistics expenses are outside your means, and that you have to adjust your fees because of the higher gas prices or maintenance costs.

It can help you set KPIs for employees

A business budget isn’t limited to the owner or the top management only. Savvy entrepreneurs cascade the information to their staff members to align everyone to the company objectives and even motivate them to work harder to receive potential rewards and job stability.

On the individual level, a yearly budget can improve the performance of everyone in the company, too. You can set the KPIs during the preparation stage and then cascade them to the assigned members of the team.

Doing so will ensure that they know their respective targets and how achieving those will contribute to the general success of the operations.

Strategic business reviews measure and assess the employees’ compliance with the budget and KPI targets. These monitoring activities should be conducted regularly—typically on a monthly or quarterly basis—so that you will have enough time to take action in case anyone is going off track. Skipping this step will prevent you from achieving the year-end results that you wanted when you created the business budget.

The regular monitoring of the budget will also allow you to analyse variances in your performance objectively. By considering how various factors have affected your actual performance versus the budget, you and your team can develop a realistic budget forecast that will help maintain or improve the financial health of your business.

Complete the Cycle Through Budget Forecasting

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Some people think that budget and budget forecast can be used interchangeably. After all, preparing budgets require making assumptions about your future income and expenses.

However, budgets and budget forecasting serve different purposes (even though both contribute to the long-term success and profitability of the business).

It’s true that your budget is the basis of the budget forecast. But sets the latter apart is that budget forecasting it provides a predictive view of the company if the budget has been strictly followed.

Moreover, budget forecasts tend to be broader than budgets since they are not used as an operational roadmap for the entire company. Instead, this tool creates a budget projection that will be used when analysing the variances between the budgeted values and the actual figures.

To create a budget forecast, you must:

  • Break down your budget across specific periods within the upcoming fiscal year. It can be evenly distributed or higher during certain times—just make sure that it reflects the stream of revenues and expenditures of your business. Business owners who have been operating for at least a year typically use historical data from the previous year as a reference in allocating the budget to the time periods.
  • Establish the KPIs that will allow your company and employees to achieve results as close as possible to the budget. Doing so will optimise the difficulty of the performance goals and ensure that all actions being done contribute to achieving the company’s vision and mission.
  • Yield a budget and KPIs for the following fiscal year of the business. Reviewing the actual performance against these values will give you ample chance to address the risks that could prevent the achievement of your goals or even modify the plans to match the current situation better.

Key Takeaways

Starting a business without a budget is like pouring water down the drain.

Plan for the success of your business through careful budget preparation. It influences how you start the operations, monitor the performance of the company and the employees, and come up with informed decisions that will shape your future as an entrepreneur.

Maximise the benefits of having a business budget by reviewing it regularly. Find out which areas you did well and which ones still have room for improvement.

Once you have gotten the hang of things, move forward by taking the time to create a budget forecast. Doing so will allow your organisation to establish challenging but realistic objectives that will make your employees feel empowered and committed to the company’s success.

If you need further guidance on preparing a business budget, feel free to speak to our team of management experts here at 2account. We have years of experience in business planning and creating a budget for corporate professionals, small business owners and entrepreneurs.

Thanks for reading, and we hope to hear from you soon!

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