Despite all the important things we must deal with as business owners, the one constant and most important responsibility we have is to manage our company’s money.
Like everything in your business, the money stuff must be planned, monitored AND managed. The right tool to help you do this is your budget.
What Is a Budget?
A budget is a financial plan for your business. It is a forecast of future monthly revenue and expenses, usually for a year. It maps out how you want the flow of money to be from incoming revenue to outgoing expenses. This is the power of budgets. This is proactive financial management.
Why Do I Need a Budget for My Business?
Because it is the responsible way to run and grow a business.
A budget gives you peace of mind because:
- It provides you with clarity about how much money your business needs to operate effectively.
- It allows you to determine the revenue required to cover the expenses AND provide a decent income for you AND how much money there will be left at the end of the year.
- It sets out the money plan for your business, allows you to make smarter decisions and it puts you in control.
Creating and using a budget makes you really, really think about your business and the year ahead.
For example, if the projected expenses are more than the revenue then you need to make tradeoffs. You may need to eliminate or reduce some expenses. You may need more costs allocated to marketing and business development in order to increase the revenue. These are often difficult tradeoffs to make and so you need to think through the ramifications.
A budget provides a financial road map to track the financial results.
If the results are on or ahead of budget, then you know the business is on track. If, however, the expenses are higher than budgeted and/or the revenue is lower than planned then you know you must take action to bring everything back on track. Do not assume everything will correct itself!
A budget is the best decision-making tool.
For example, you want to hire someone, but you are not sure if you can afford it. You plug the cost into your budget and see the result. Does it make your expenses more than your revenue? If it does what can you do about it? Decrease expenses, increase revenue or a combination of both. Or you might even have to defer the hiring of the new person until you can afford it.
To quote Dave Ramsey, “A budget is telling your money where to go instead of wondering where it went”. And, I agree with Nancie Mwai, “The best way to stick to a budget is to start one.”