The thought of sitting down and preparing a budget for the year might be enough to get you groaning and thinking up excuses. Yes, it takes time and it takes a hard look at your finances. However, in the end, it will both help you save time and help you both save and money. Here, we’re going to go into just a few of the reasons you should set and maintain your budget.
What is a budget?
As there are a few different aspects to small business accounting, let’s start by clarifying what we mean by a budget, in the first place. Essentially, it’s a record of all the debts, obligations, and overheads that come into play. It helps you get a handle on the overall costs of your rent, utilities, insurance, payroll, IT costs, marketing costs, loans, and so on. As part of their budget, many business owners will also take the opportunity to measure against all the different sources of income, which can make it closer to a cash flow review, or help you build one.
Know your cash flow
A budget is crucial for helping you get to grips with your cash flow. By measuring all the money coming into the business and where you spend it, you get a clear snapshot of your financial health. Having your cash flow on hand makes it a lot easier to not only ensure that you’re working at a profit, and to get a good idea of how much spare cash you have to invest in the business at any moment. It also helps you highlight which products and services are generating most profit, and which overheads you might be spending more money on than you probably should be. It makes it much easier to rein in costs or take advantage of money-making opportunities when they arise.
Get it ready for funding
If you ever plan on applying for a business loan, business credit, grants, or funding of any kind, you need to have your books to hand. Bookkeeping comes along naturally with a budget, since you need to be able to record and reference all your expenses and income to make one. By demonstrating the finances of your business, you make your chances of successfully applying for funding all the greater.
It makes it easier to stick to your spending plans
A budget isn’t just a look at how much you’re earning and spending right now, it also takes into account how much you’re planning to make and spend. As such, it helps you put down a plan and settle on a figure on what costs of business are acceptable. Businesses that create a budget are more likely to stick to it. After all, once you’re aware of that threshold, you will consider every investment a lot more carefully before pulling the trigger on it. Otherwise, if you’re not as mindful of your spending, or where it should be at, it’s very easy for those costs to grow until they become unmanageable.
Helps you set meaningful and measurable targets for growth
To some, managing any kind of profit in a small business is enough of a success in and of itself. However, if you have growth on your mind and you’re hoping to keep expanding your business in the future, you need to have a clearer definition of success. A budget can help you get a good idea of what your costs are and how much you’re making. As such, it can also help you divine a better target of how much you should be making over your budget. You can set and track cashflow goals that can help you see how much closer you’re getting to that much-valued growth.
Enable better long-term planning
Without a more zoomed out look at your finances and where your money is currently owed and coming in from, you are more vulnerable to sudden risks. Unless you can find ways to be flexible and trim down your budget when necessary, then short-term issues like a late shipment, late payments, or sudden repair costs for the premises or equipment can be a lot harder to deal with. A budget can help you manage your expenses so that you have a little more room to react to sudden issues. Having all of your costs laid out could help you plan a strategy where you’re able to quickly cut them down as and when is needed.
It makes tax preparation easier
As part of building your budget, you’re going to have to sharpen your accounts up. This means keeping records of all of your income and expenses, saving receipts, invoices, and generally ensuring you have monthly reports of what came in and what went out. Of course, those are all of the details that you need on hand when it comes to tax preparation season. Many small business owners are caught off guard by the time tax season arrives. A need to suddenly prepare all the financial information they have on hand can lead to a lot of crunch and a lot of stress. Maintaining your budget makes it a lot easier to do the work that goes into tax preparation ahead of time.
Maintaining your budget
Initially, setting a budget can seem like a lot of work, but here are a few tips that are going to make it all the easier:
- Consider downloading some free bookkeeping software or buying a premium suite if you run a larger business. Many of them have automated features, such as the ability to scan and integrate receipts and invoices. Otherwise, they simply make it much easier to manage.
- Don’t overcomplicate things. Manage your costs and financial obligations in different categories (such as office supplies) rather than breaking them down into each individual cost (paperclips, pens, etc.)
- Review your budget every month. It’s easier to manage it when you come back to do a little work each time, rather than leaving it to each quarter, making yourself do a lot more work.
- Leave some wiggle room in the budget for emergency costs. It makes it a lot easier to react flexibly to issues that could otherwise become a financial emergency.
Hopefully, the points and tips above convince you of the necessity of a budget for your business. The sooner you get started on it, the easier it is to maintain, so why wait?