The Benefits of Budgeting as a Business Owner
Running a business isn’t easy. You’ve got so many things to do and worry about on a day-to-day basis. So, imagine your surprise when you open your bank statement and find numbers you didn’t expect. It’s not uncommon for business owners (who are as busy as you!) to pay less attention to spending when trying to keep the wheels in the machine turning without the help of a business budget.
While sometimes you may have to do what you need to do to keep afloat, operating a business on a crisis-to-crisis basis is not sustainable when it comes to your finances. While you may be generating revenue, you may not be returning a profit because of your expenses. This is where a business budget comes into play: a financial plan that will help you and your business earn profit, while also planning for risk and ensuring you have a healthy cash flow.
What is a business budget?
Put simply, a business budget is nothing more than financial information about your business that you, a business owner, can use to make educated predictions and base decisions on. Estimating and matching your expenses to your revenue helps determine whether or not you have enough money to fund operations, expand the business, and generate income.
What is a balanced budget?
When you hear “balanced budget,” your mind may automatically go towards government spending (like most people!). This phrase applies to businesses too, and is not as complicated as it sounds! A balanced budget is one where total revenues are equal to or greater than total expenses. It’s an indicator of financial health and allows room for business growth.
What are the benefits of creating a budget?
Creating a structured and comprehensive plan on how to balance your business’s budget is the best way to proactively identify potential challenges and anticipate future revenue and expenses. Without a business budget, you risk spending money your business doesn’t have, not spending enough to compete, or failing to build a solid emergency fund.
Here are 6 important reasons why you should create a business budget today:
- Creates focus on long-term financial goals. Creating a budget forces you to move away from the day-to-day management of your business to think about your long-term objectives. By outlining target goals, you can pinpoint exactly what needs to be done to help your business grow.
- Increases team motivation: A formal business budget will provide senior management and the leadership team with a better understanding of your company’s overall direction and long-term targets. By giving your managers/directors a sense of the path your company aims to be on, they have the information to motivate and help their departments reach these goals.
- Evaluates job performance: Comparing your budget to real reports across departments allows you to see how your employees are performing. As a business owner, you can use this information to give feedback and set individual goals for each team member. Consider adding bonuses or incentives tied to performance when budgeting, as this can give employees an extra push to meet their goals.
- Provides valuable information for investors and financiers: Banks and investors will always ask for a cohesive budget. When you think about it, who would want to pour money into a business when they don’t know how the money will be used? It’s always good practice to have details on past budgets and how they were managed on hand for future discussions with potential investors.
- Minimizes risk and manages cash flow: It’s pretty simple: having a budget helps minimize risk. Whether you’re expecting tough times ahead or your business’s offseason is around the corner, planning ahead will help you minimize expenses where you can.
- Provides review of profitability: When you’re deep in business development and day-to-day management, it can be difficult to stay on top of where your profits are coming in from. As you’re creating a budget, you should ask yourself questions like, “Which of my services are the most profitable?” to help inform decisions on what parts of your business must be reevaluated or can be expanded.
As a business owner, budgeting allows you to make sound financial decisions that work towards your long-term goals. While your business may be able to survive in the short term without a budget, it’s not the same as succeeding.
If you want to know where exactly your business’s finances stand and how you can prepare for growth, give us a call at 416-646-0550 or request a consultation. Our team of experienced CPAs can help you create a realistic business budget and cash flow plan for the future. In our next blog, we’ll be giving you more tips on how to create a business budget and how we can help.