The advantages of budgeting for small businesses
Small business owners vary in the attention they give to budgeting. Some take it seriously, others would rather steer away from the concept of budgeting and just get to work. To many small business owners ‘Budgeting’ is a dirty word, but the truth is that many business owners go through life without exploiting the power of budgeting. Particularly for a small business this is what it is all about.
A budget, or forecast, is a forward looking document. It reflects the financial agenda and outcomes for your business both currently and into the future.
The many benefits of budgeting
Budgeting helps steer the business. For example:
- Small business owners are busy. From answering phones to packing orders, no job is too small. It’s too easy to get caught up in the day to day grind without paying your business the sort of attention it needs to prosper and at the same time – most importantly – achieve your goals. The preparation process, with budgeting a most critical element, forces you to think about where your business is heading and to commit to it in numbers.
- If administered properly, budgeting provides a framework for accountability. This doesn’t simply mean expense management. A good budget will ensure everyone in the business, from Sales and Procurement to Administration and Human Resources, is accountable for their commitment to the future.
- Budgeting, when properly converted to a three way forecast, will indicate cash requirements over a longer period and assist in proactive cash flow management. It might not be a banking requirement, but it is a critical management tool.
- The use of forecasting can demonstrate to the business owners the impact of cash flow management strategies, such as better debt collection or improving the stock ordering process, which in turn creates well aligned actions for the business.
- The formulation of a budget commits the business owner to a plan. It enhances an understanding of the driving forces behind the business and will enhance your understanding of what drives your business.
- Budgeting enables you to focus on profitable activities and think about and plan the future. As a proactive business you will be prepared – you will have a detailed annual budget and cash flow forecast, but will also set a longer term high level forecast that demonstrates what the business is aiming to achieve financially long-term. A document such as this is absolutely essential for succession planning and exit strategies.
- Too many businesses have all the good intentions in the world but don’t achieve them because the owners are ‘time poor’ and/or constantly ‘fighting fires’. A written financial commitment in the form of a budget, together with regular review of achievements to date, can sharpen the focus of the business owners and management team.
Budgeting takes a little time, but it makes time too because a smooth running business is efficient. . Ongoing budgeting ideas don’t need to be time consuming, and once formed they lead to more organised, efficient and profitable outcomes. It is at this point that business owners typically want to spend more and more time in the business – not because of desperation, but because of enjoying the business direction and understanding the powerful impact budgeting can make on their business.
The availability of Cloud based accounting software, with all its advantages of real time data and accessibility, means that implementing the budgeting process in reporting, including interaction with management and advisors, is now easier than ever.
Whilst many business owners don’t think they have the time or expertise to prepare a budget, they soon realise the benefits of doing so and embrace the disciplines it can add.