“Is Budgeting Important for My Small Business?”
Updated: Sep 28, 2022
How Budgeting Can Help Increase the Financial Success of Your Small Business
Creating a realistic and manageable budget for any business can be intimidating. Having an understanding of what the main components are when developing one will not only help you have a better grip on your business finances but can also help lead your company into financial success. In this blog post, we have come up with the best tips to use and some things to consider when creating a budget for your small business. If you’ve tried to come up with a budget for your company but you don’t really know where to start, then this post is for you. Keep reading to learn more.
We know what you’re thinking. How can someone not have a general idea of what a budget is? People use budgets all the time in everyday life, right? Well, not necessarily. Most people didn’t grow up learning how to create a budget let alone how to manage their finances, so we can throw this assumption out of the window. However, like many things, it’s never too late to learn!
So, what exactly is a budget? In an article written by Bassam Mustafa titled “Why Your Small Business Needs a Budget”, Mustafa defines a budget as “an estimation of income and expenses for a specific period. A budget can also be termed as a tactical action plan or as an outline of the strategic business plan” (Mustafa 2022) or as we like to call it, a “guiding post”. Along with this, there are different kinds of budgets your company can have within itself. These can include an emergency budget, operating budget, labor budget, sales budget, etc.
This leads us to the first step in the budget making process, which is to identify the targeted goals for your business. Once you are clear on what you’re working towards, the budget will be a general and visual outline used to see how much it will cost to operate your business, where money needs to go, and how much revenue your business needs to generate to make a profit. Once you’ve done this, it’s time to dig into the numbers.
Understanding Your Business Expenses
Every business owner knows you have to spend money to make money, and it’s equally important to have every dollar work for you. When creating the expense part of your budget, we suggest tracking your costs monthly so you have insight into where every dollar is going. This will reduce the chances of missing an expense and will give you time to explore other options to help reduce your costs. A good example of a monthly cost is utilities. They are normally a recurring expense so you can always plan on incurring these costs each month. Other examples would be rent, payroll, insurance, subscriptions, etc. There are also some expenses that you may pay every few months or annually that would need to be factored in, such as an annual business license or property taxes. These can easily be forgotten about because they are not a constant in your monthly budget. Having a holistic view of your expenses from all angles will always be a good way to manage your spending, prevent any unexpected costs, and help stay on track with your budget.
Let’s Be Realistic
The most important step when creating a budget is to be realistic with what your business is able to achieve. For example, if you’re just starting out, it’s not reasonable to set your budget for a million dollars in sales for your first year. Listen, if you can achieve this, power to you and congrats! But for most small businesses, this is not a practical starting point. Along with this, you also don’t want to undersell yourself either. When setting your revenue goals, take the time to find that happy middle ground where your sales are realistic to what you can do but also strive to increase past numbers. Most importantly, you want to make sure you’re bringing in enough money to cover your expenses and make a profit. I mean, what’s the point of running a business if you’re not making a profit? Are we right or are we right?
Your cash-flow is the heart of your business and if you take anything away from this, have it be that. Without having good cash-flow management, your finances will be in serious trouble. With having a small business, having cash-budgets are essential to ensure you don’t run out of money. This will mean not just relying on your bank balance to tell you if you have enough money to cover payroll and operational expenses, but to have a plan for your spending and knowing if you require additional resources. These resources can be a line of credit to help whether the seasonality of your cash flow, a loan to help to make large purchases and a grant to help pay for marketing and other operational expenses. Having proper cash-flow management and insight will allow you to have all the knowledge needed to have a successful life-line of your company.
So Now What?
We think we made it pretty clear how important budgeting is. Budgeting is truly the backbone of any financial plan and creating an effective budget can only increase financial success. Having the knowledge and tools to execute a manageable budget is the key for small businesses. Let’s do a quick recap of what we covered:
Know what a budget is and what kind of budget your business needs
Set your targeted goals
Know what your business expenses are
Set realistic revenue goals
Cash-flow management is the heart of your company
We know this was a lot of information, but we hope that these tools will give you an idea of where to start. Just know you never have to navigate this on your own. Having additional support to take your business to the next level can also be something to look into if your budget allows it. Having a virtual CFO, like ICS, can take a lot of the stress off of you so you can focus on other aspects of your business. We can help you navigate your budget, take care of all your bookkeeping needs, and much more. It never hurts to explore your options and schedule a free consultation call (wink wink).
Remember, if you have any questions or need some guidance, ICS is always here for you. We can help you get your business into shape!
Mustafa, Bassam. “Why Your Small Business Needs a Budget” 2022, Forbes.com, https://www.forbes.com/sites/forbesbusinesscouncil/2022/02/07/why-your-small-business-needs-a-budget/?sh=51d8dbdd1233