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Importance of Budgeting in a Business Setting

Darren Laudenbach - Sunday, February 07, 2016

Regardless of whether your business employs one person or a thousand, one of the most important—and most overlooked—aspects of running a successful business is budgeting correctly. Most of us are becoming experts at budgeting for our families, maybe even helping extended family members and/or friends to set up their own budgets (go HERE for more resources). However, the budget you establish for your business affects more than just your paycheque…it affects whether you will even have a business in a few years.

Start the process by sitting down (with your business partner or anyone else who has a big say in the running of the business) and utilising tools for developing your budget, such as by gathering your bills, bank statements, pay slips, savings statements, copies of other expenses, receipts, and so on, just like you would for your personal finances. It is easy to input the expenditures into a software program such as Xero or Moneysoft to keep track of spending and paying bills, but some people prefer a spreadsheet format, and for a business, a spreadsheet format or Quickbooks option may be the better choice. Keep in mind that the program does not do the work for you; it only organises the work and simplifies the process. Whatever method you choose, be prepared for a shock when you begin to realise where the money has been going.

Why is it so Important?

There are several reasons that budgeting is so important for a business, but we will just go over some of the top-rated ones in this article. Keep in mind that your ranking may be different in your business, depending on your needs and the size of the business.

  • Where does the business’ money go? This is extremely important, because if you do not know where your money is going, the business can fail – many do. No doubt about it—it is THAT important. For instance, the budget helps you understand everything from the average utility and rent expenses to how much your employees are costing you in photocopying. The largest businesses often have finance experts (such as accountants, bookkeepers or financial controllers) to figure this out, but small business owners are usually jacks-of-all-trades, so this is important to learn from the earliest stages of opening the business. Know where each dollar goes, and if it does not make sense to spend it, find a way to stop the leak before it grows into a flood.

  • What is the next step? Once you know how much is going where and what will need to continue going in that direction, you have to determine if/whether you can cut unnecessary costs. After all, limiting expenditures gives you a chance to put more money into other things, such as employee pay, products/services offered, paying a loan, paying yourself / profit etc… For those businesses that already have departments established, a certain amount of money is given for operating costs, such as expense accounts, and it’s no different for a small business—being the business owner you are the master of all expense accounts.

  • Where do I go after that? Now that you know where it is going and where it will not go any more, you can create a new roadmap for your company’s financial future. Every business needs a heading, in particular a financial heading, because this gives you a means to steer the ship. You know what you have, what you do not, and what you can put toward getting what you need in the future. The budget is your navigational system so that you can steer your ship more efficiently in the future to achieve your profit, growth and other goals.

     
  • How can I integrate future needs? You may not be able to budget for everything you will possibly need in the future—especially those things that arise as your business grows and expands. Make sure that you are saving or otherwise setting aside money for the unknown in the future, such as replacing outdated machinery, software, work vehicles etc. This is a grey-area fund (not an emergency fund, that is separate) that most of us would just call a “savings account.” The money is general and not labelled for paying anything specific. 

As you can see, the budget is one of the most invaluable tools when it comes to a business of any size and its respective success. Without a budget, you might as well take down your shingle and pack it up, because the chance for financial freedom through your small business is nearly non-existent. You have to manage your business accounts just as you do when considering your family’s finances, with even greater diligence!

“A house is built by wisdom and becomes strong through good sense. Through knowledge, its rooms are filled with all sorts of precious riches and valuables.” --Proverbs 24:3-4