While it is crucial to continuously improve daily operations, sticking to a business budget grounds your decisions on realistic expectations. Without a business budget, you won’t be able to properly monitor and manage your finances, resulting in financial discrepancies.
What Is A Business Budget?
A business budget is necessary as it serves as a framework for staff and executives to enable financially-sound decision-making. It is used to comparatively analyze budget vs performance of either past or current periods. Usually, it is updated once a year by senior managers.
But with all that said, what exactly is a business budget?
A business budget, according to Info Entrepreneurs, serves these four main purposes:
- To monitor and control finances of the business
- Ensures continuous funding for current and future activities
- Enables staff to make sound financial decisions while meeting long-term objectives
- Stabilize your cash flow to handle future business projects and ventures
Aside from that, the business budget is also a detailed representation of the future results, financial position, and cash flows set in an organized timetable.
What Are The Parts Of The Budget?
Three main components that make up a budget are the projected cash flow, the costs, and the revenues.
The projected cash flow: This is used to evaluate future cash positions every month, like cash inflows and outflows.
Costs: Businesses typically incur three types of costs: fixed costs (rent, salaries, and financing costs), variable costs (raw materials and overtime), and one-off capital costs like equipment purchases.
Revenues: Your total sales and income-generating activities and operations fall under the revenue bracket.
The components are part of the recipe to determine key financial ratios like return on investment and profitability. The figures help analyze the performance and dictate the direction of the business through sound strategic planning. You can learn more about financial planning with Monarch’s online courses.
What’s The Difference Between A Business Budget And A Business Forecast?
A business budget lays out plans for where the business intends to go. A business forecast, on the other hand, indicates where a business is going. To further differentiate, a budget is based on desired goals independent of a business’s current financial situation, while a forecast is estimated around it.
Why Is The Business Budget So Important?
The business won’t run at optimal efficiency without a proper business plan. The business plan promotes and ensures sound financial planning as it continues to grow. In addition to that, it also serves as the basis for stakeholders to assume a business’s profitability through figures.
Here are 8 reasons why you should have a business budget.
1) It Promotes Effective Financial Management
Through proper financial management, the company ensures that it isn’t just making decisions on a whim, which could spiral to disaster if left unmanaged. Proper financial management also allows a company’s accounting team to file self-employed taxes, accurately, reducing the risk of an audit.
2) It Allocates Resources Properly
Proper resource allocation prevents any costly inefficiencies from taking place. By doing this, you marshal your resources which make for a more productive and straightforward operation.
3) It Monitors The Company’s Performance
Comparing your business year-on-year is an effective method of benchmarking its performance. You can base decisions on comparing projected figures, for instance, with previous years to show performance.
4) It Meets And Reaches Business Objectives
With a business budget, you can formally calculate and set realistic expectations on the growth potential and profitability by month, year, or in the long term.
5) It Supports Sound Decision Making
The business budget sets a quantitative basis for action-planning and diving in certain, potentially high stakes ventures. This could include something as simple as choosing a project venue to something massive like acquisition or merging.
6) It Identifies Potential Weak Or Improvement Points
Blind spots that could harm the business are more readily seen through graphs and figures in the business budget. In determining weak points, the business can change its course of action to tackle that issue before it comes to fruition.
7) It Allows For Future Planning
With a business budget, you and your colleague’s actions are held accountable by the financial state of the business. This can also provide a solid vision on potential paths to take to prime yourself with opportunities.
8) It Keeps Staff In The Loop
A business budget is not only for high-level executive decision-making, but it also allows transparency for the other staff members. A good business budget can remove doubts and uncertainties of the business performance (or, if it’s not doing well, it can push staff to step up and improve).
With proper business financial planning, you save yourself the headache of not knowing where your money goes. It not only benefits colleagues and staff members, but with upper management as well.
Banks, Karen. February 2018. The Importance of Budgeting in Business. WLF. Retrieved at https://wlf.com.au/importance-budgeting-business/
N/A. 2009. Info Entrepreneur. Budgeting and business planning. Retrieved at https://www.infoentrepreneurs.org/en/guides/budgeting-and-business-planning/#6