Most people would not set out on a long road trip without a map to help them get where they want to go and to navigate the obstacles along the way. Just like a road trip, your business needs a map to ensure you get to where you want to be. That financial map is called a budget.
Budgets are typically prepared ahead of time, so you have time to plan for upcoming events. Late fall is the perfect time to budget for the upcoming new year, as it gives you several months to prepare your budget, as well as reflect on what has already transpired for the current year. In order to prepare a useful budget, you not only need to anticipate the future, you need to review and reflect on the past to accurately forecast for the coming year. Looking at your current situation and understanding the business environment will help you better predict what the next year will look like.
Creating a budget does not need to be difficult. The hardest part is getting started. Once you have an initial budget, you can use that budget as a template for future budgets, which will save you time and effort. You will also be able to use your budget as a guide to judge how well your business is performing and if any adjustments need to be made during the year.
Here are just some of the many benefits of budgeting:
It allows you to anticipate future events and plan accordingly
It allows you to grow and expand your business
It helps you understand your spending habits and holds you accountable
Because cash flow normally has peaks and valleys during the year, it allows you to ensure you have enough money throughout the year and avoid cash shortfalls
It protects your business from failure due to lack of cash flow (one of the main reasons businesses fail)
It allows you to determine borrowing needs and capacity to pay it back
It helps you judge the effectiveness of marketing efforts
It helps you determine proper staffing levels, employee compensation and benefits capacity
If budgets have not been on your to-do list, you are not alone. According to a recent survey by Clutch, 74% of small businesses with 10 or less employees did not have a formal budget. For those small businesses who do have a budget, however, statistics show that over 60% are able to meet or exceed their profitability targets, proving that having a budget can help your bottom line.
In order to successfully stay within budget, you need to review the budget frequently. The longer the span between reviews (i.e. quarterly vs monthly), the more likely you are to go over budget and the longer it can take to get back on track. Once established, your budget is another tool to help your business succeed and grow in an increasingly challenging business environment.