There’s nothing worse than opening your bank statement and finding numbers you didn’t expect. You’re so caught up in the day-to-day of running a business that you often stop paying attention to what you spend. Just like how finding surprises in your personal bank statements can be startling, you don’t want to be discovering new concerns every time you take a deeper look at your business expenses and income.
Operating on a crisis-to-crisis basis is not sustainable when it comes to your business’ finances. While you may be generating revenue, you may not be returning a profit, because your expenses are too high.
A budget will help you actually earn profit, while also planning for risk and ensuring you have a healthy cash flow.
What is a balanced budget?
The phrase “balanced budget” gets thrown around a lot, especially in the context of government spending, but it’s not as complicated as it sounds. A balanced budget is one where total revenues are equal to or greater than total expenses. It’s an indicator of financial health and allows room for business growth. At the end of the day, a budget is nothing more than financial information you can use to make educated predictions and base decisions on.
What are the benefits of creating a budget?
By creating a structured and comprehensive plan on how to balance your budget, you’re not just addressing issues as they come along – you’re proactively identifying potential challenges and anticipating future revenue and expenses. Simply put, a budget gives you information on how much cash you have, how much you need, and how much you can spend.
Here are some important reasons why you should create a business budget:
- Creates focus on long-term goals
- As we’ve suggested above, creating a budget forces you to move away from day-to-day management of your business and allows you to think about your long-term objectives. By outlining target goals, you can pinpoint what exactly needs to be done to help your business grow.
- Increases team motivation
- A formal business budget provides senior management with a better understanding of your business’ overall direction and long-term targets. By giving your managers/directors a sense of the path the company should be on, they can motivate their departments to reach these goals. You can’t expect them to work towards a goal they don’t know exists. This also ensures that your key decision-makers can make informed business decisions while keeping the bottom line top of mind.
- Evaluates performance
- Creating a budget and then comparing it to real reports allows you to see how your employees are performing. You can use this information to give feedback and set individual goals for each team member. Consider adding bonuses or incentives tied to performance when budgeting, as this can give employees an extra push.
- Provides valuable information for investors and financiers
- Banks and investors will definitely ask for a cohesive budget. In order to pour money into your business, they’ll want to know how you’re going to use the money. They’ll also want to see how budgets have been used and managed in the past.
- Minimizes expenses and manages cash flow
- A budget helps minimize risk. Whether you’re expecting tough times ahead or your business’ offseason is around the corner, planning ahead will help you prepare and minimize expenses where you can.
- Provides review of profitability
- When you’re deep in business development and day-to-day management, it can be difficult to stay on top of where your profits are coming in from. If you’re a service-based business, which of your services are the most profitable? When creating a budget, you’ll be asking yourself these kinds of questions and your answers can inform decisions on what parts of the business must be reevaluated or expanded.
As a business owner, budgeting allows you to make sound financial decisions that work towards your long-term goals. Your business can survive without a business budget, but that’s not the same as succeeding.
If you want to know where exactly your business’ finances stand and how you can prepare for growth, give us a call at 647-476-2145 or schedule an appointment. Our team of experienced CPAs can help you create a realistic business budget and cash flow plan for the future. On our next blog, we’ll be giving more tips on just how to do so and how we can help.