The importance of budgeting for small businesses.
To many small business owners, ‘Budget’ is a dirty word. Maybe it comes from politics, maybe we are scared off by the dreaded ‘household budget’ but the bottom line is that many business owners go through life without exploiting the power of budgeting in their business.
A budget, or forecast, is a forward looking document. It reflects the financial agenda and outcomes for your businesses into the future.
Some advantages of budgeting include:
- The preparation process forces you to think about where the business is heading and to commit to it in numbers. 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 importantly, achieve your goals.
- It provides an accountability framework if administered properly. This doesn’t simply mean expense management. A good budget will make everyone in the business from Sales and Procurement to Administration and Human Resources, accountable for their commitment to the future.
- When properly converted to a three way forecast, it will show cash requirements over a longer period and assist in proactive cash flow management. It should be seen as a management tool, not a bank requirement.
- 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 will enhance your understanding of what drives your business. It will focus you on profitable activities and make you think to the future. A proactive business will prepare 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 achieve financially. A document such as this is absolutely essential for succession planning and exit strategies.
- It commits the business owner to a plan. Too many businesses have all the good intentions in the world but don’t achieve them because they are time poor and constantly fighting fires. A written financial commitment in the form of a budget, together with regular review of achievement to date, can sharpen the focus of the business owners and management team.
Budgeting doesn’t have to be a time consuming process. Simple budgets can be done in a matter of minutes. However, once business owners implement the process inevitably they spend more time on the formulation as they understand the powerful impact it 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 have the time or expertise to prepare the budget they should look to initiate the budgeting process in their business and embrace the disciplines it can add.