“I started a business to hone my budgeting skills,” said no one ever.
The reality is that budgeting is critical to the success of your business.
Without a budget, you may not be able to meet current expenses, much less fund unexpected ones.
One survey found that the top reasons businesses failed included pricing and cost issues, losing focus, and cash flow problems.
These issues could be anticipated with a solid budget.
Benefits of a budget
If you were planning a long trip to many destinations, you would pay attention to how much your travel will cost and how you will navigate your journey.
Having a budget for your business serves much the same function.
Here are some benefits of a well-crafted budget:
Reporting: Do you have a Board of Directors, advisers, or shareholders? If so, they want to know how your business is doing. They will expect periodic reports that include a profit and loss statement showing your revenue and expenses.
Contingency planning: If you’ve traveled recently, you know to anticipate problems. Flights get canceled or delayed. Hotels and car rental companies may lose your reservation or be unable to honor it due to a lack of capacity.
Running a business doesn’t go smoothly either.
The Covid-19 pandemic upended the revenues of many businesses. Natural disasters (fires, floods, extreme weather), losing a key employee, and interruptions to your supply chain can have significant financial ramifications.
A solid budget will establish appropriate cash reserves to deal with unexpected expenses.
Obtain financing: If you need a loan, your bank will expect to see financial statements showing operational costs and projected revenues. A carefully crafted budget will be an essential part of this review.
Attract investors: You may want to attract investors to your business. They will have similar requirements to lenders.
Control expenses: With a budget in place, you can compare projected expenses to actual numbers. If there’s a gap, you can adjust before it’s too late.
Business plan: A business plan is broader in scope than a budget. While both include financial forecasts, a business plan will discuss commercial opportunities, the state of the market in which you compete, and your current and future strategy.
If your company needs a business plan, it must first create a budget, which is an integral part of the plan.
Improve efficiency: A budget can improve the efficiency of your business by helping you prioritize projects and initiatives.
Stay nimble: A plan and a “nimble mindset” combine to empower you to “pivot that plan and help lead your organization through turbulent times.”
Set goals: A budget can help you do more than just set goals. It can estimate the revenue necessary to meet those goals. You can then communicate those goals to update employees on your expectations and review variances between the goal and actual numbers.
Having a budget will also improve your decision-making, anticipate cash flow issues and help you plan for the future.
Best budgeting practices
Budgeting doesn’t have to be tedious and labor-intensive. Here are some best practices to follow when doing your business budget.
Leverage software: There’s abundant software available to help you create a solid budget. This article reviews a number of the leading ones.
The right software can create a budget, show you the variance between actual and budgeted numbers, make cash flow projections, and engage in contingency planning.
Revenue review: Projecting your revenues is critical to preparing a budget. Use historical data to get an average over time and identify seasonal patterns which could impact your cash flow.
Know your expenses: Every business has both unique and typical expenses. Identify your fixed costs (like rent, insurance, and taxes). Then consider variable expenses (like advertising and capital expenses).
You need to plan to fund both fixed and variable expenses. Both types of costs will be deducted from your gross revenues.
Expect the unexpected: Set up cash reserves, so funding is there when the unexpected happens.
Create a profit and loss statement: A profit and loss statement (P&L) is the end product of your budget. You’ll aggregate your income and deduct your expenses. The bottom line will be a profit or a loss.
At Aura Wealth, we are certified public accountants and financial advisors. We help our business clients select budgeting software, create a budget, monitor it for variances, make course corrections when necessary, and file tax returns. We also provide many additional services, including investment management, setting up retirement plans, and retirement planning.
