This FAQ explores the importance of budgets for businesses and answers common questions about creating and utilising them effectively.
What is a business budget?
A budget is a plan of your businesses spending, based on your expected income and outgoings for the quarter or year. It helps you predict what you need to spend for the year, identify any available capital and helps you predict your revenue for your chosen period.
If utilised correctly, it can help you to plan your spending and business activity for the year, and give you guidance when it comes to defining your financial goals too.
Why are budgets important for businesses?
Budgets are used to track when and how you earn or spend money over a period of time. Preparing a budget is an important pillar of your overall business success and security. With a well-prepared budget, a business can plan out expenses, reach business goals and anticipate any operational changes as needed to support the business. A budget can also help a business understand its operating costs in greater detail and can be used to track performance against expected spend.
We think there are 5 key reasons why having an in-depth budget is vital:
1. Preparing for emergencies!
It’s fair to say we’ve had some turbulent times recently, and this very much highlights the need to plan for the unexpected. A budget is the ideal tool to help you prepare. It will allow you to set aside reserves for emergencies rather than diverting funds from other business operations and potentially introducing risk into your business.
2. Trim costs and avoid overspending
The process of building a budget forces you to take a close look at all your spending habits. With inflation rising cost sensitivity is becoming essential and a deep review into all expenses could identify excess resources in some cost centres. So, you can trim these additional costs and avoid overspending to ensure you’re utilising your funds in other, more effective ways.
3. Managing sales targets
A robust budget isn’t just about managing spend though, it’s also about determining how much revenue is needed to reach the company goals you set out for yourself. Once all fixed and variable costs are accounted for, the budgets allow for sales targets to be easily calculated and more importantly, monitored.
4. Attracting investors
Investors are looking for companies who have their spend accounted for. A well-presented budget goes a long way to show your commitment to the business. If an investor is able to track the trajectory of the business growth and see how performance has fared against previous budgets, they’re going to have more confidence in investing – which ultimately drives value up.
5. It helps you achieve your personal vision of success!
Everyone has their personal vision of success – at Ascentis, we believe this is achieved through business success. So if you’re able to commit your long term business goals into annual, quarterly or even monthly budgets, you can easily cascade down your business vision into smaller, trackable performance indicators, allowing you to work toward your personal vision.
And don’t forget to track it….
Preparing your budget is only the first step in financial management. A continuous process of review and tracking your actual results against budgets will allow you to measure against your expected results and quickly react if the business is deviating, or put actions in place to increase growth.
What are the key components of a budget?
When you’re creating your budget, the more accurate you can be, the better opportunity you have to help it inform your business activities and support you in growing your business.
Expected revenue – This is the money you expect to make through the sale of goods and services. You should be able to forecast this based on your previous years in business. It’s essential you have an accurate idea of what’s coming in to your business, in order to budget for the future in your business.
Fixed Costs – This is a regular expense that you pay consistently. You know it’s coming every month and it’s vital to keep your business running. For example, it might be computer software or rent on your offices. This is quite an easy cost to account for as part of your budget, as these payments usually come out monthly or quarterly and can be predicted.
Variable Costs – Based on the success of your business, these are the costs that could change. For example, with more success could potentially come heightened staff spend, or the cost increased production for more products. Using your expected as a guide, you can predict increases in work and variable costs that might come with it.
One Off Expenses – A one-off expense can be hard to predict by their very nature. You might need to repair a company van, or replace a broken laptop for example.
Despite the difficulty in knowing when these expenditures might occur, it’s important you keep track of the condition of your assets, and keep money aside to deal with these issues if they do crop up.
Cash flow – Cash flow gives you more in-depth insight into your financial situation throughout the year. As the name suggests, it shows you what money is flowing in and out of your business throughout the year. What’s more, it’s important to not only identify how much is coming in and out, but also when.
Your business might be seasonal, so understanding your cash flow can help you budget according to this throughout the year.
Profit – And finally, we have profit. By subtracting expenses and costs from your revenue, you can identify your budget. This gives you an idea of whether your business is likely to grow in the coming year, and help you understand where you can release funds to invest in areas of your business that can help you grow.
If you need help with your budget, or would like financial advice, get in touch with our expert team today.