The housing collapse has been a rude awakening for many Americans and has forced many people to take a good hard look at their personal finances, and come up with a better plan to manage their money. Creating household budgets, and living the frugal lifestyle, has become vogue and being thrifty has become the newest cool thing to do.
Small business owners have experienced the same financial tensions with increased competition and unstable revenues. This has created the need for companies to tighten their spending and recognize the importance of creating an annual budget.
Interestingly, many business owners don't create a budget because they either don't know how, or don't think it is a good use of their time. This is unfortunate because a formal budgeting process helps to ensure that resources are available for those things that support business growth and development.
7 Reasons to Create a Budget
1. Budgets Set Targets
Budgets are used to project revenues and spending to help determine how the organization will achieve short term and long term strategy. Budgeting estimates revenues, plans expenditures, and restricts spending that is not part of the plan. For example, budgeting dollars for marketing may help to increase product sales.
2. Strategy Requires Funding
Strategy and planning go hand in hand and budget dollars are required to fulfill strategy and organizational goals. Budgeting ensures that dollars are allocated to those things that support strategy. It is difficult to take an organization to the next level without the necessary financial resources to support the plan. For example, having a strategy to improve the customer experience may require budget dollars to launch a new customer incentive program.
3. Dollars Allocated for Aging Facilities and Equipment
Budget dollars need to be allocated for new equipment, aging facilities and new business ventures. For example, budget dollars need to be reserved to update equipment to ensure that employees have the necessary equipment to do their job. Aging facilities and equipment can have a direct impact on the customer experience so it is important to reserve resources to keep equipment and facilities current.
4. Budgets Communicate Priorities
A well communicated budget helps everyone understand what business priorities. Business owners should help employees understand strategy and how those priorities are funded by the annual budget. For example, if a business strategy is to develop a new product line, the business owner may explain to employees how allocated dollars will support the product launch.
5. Control Spending
Spending is controlled when funds are allocated and unallocated spending is not tolerated. Budgets help to establish boundaries, which eliminates unbudgeted spending.
6. Eliminate Turf Wars
Budgeting eliminates turf wars because all projected revenues have been allocated toward operations and achieving strategy. This means the budgeting process determines how and when resources are spent eliminating the strong personalities achieving hidden agendas.
7. Provides a Profit Margin
Profit margins provide resources to reinvest back into the business, which is how businesses grow. Budgeting for a profit margin helps to ensure the future success of the organization and determines an organization's ability to grow and expand.
Budgeting is the foundation for all business success. Budgets help with both planning and control of the organization's financial resources. Business planning requires making decisions about strategy and determining business priorities. Controlling ensures that plans and objectives are achieved through management of the implementation process. If there is no control over spending, planning is futile and if there is no planning there are no business objectives to achieve.
Does your business budget?
Patricia Lotich (twitter: @patricialotich) is the founder of The Thriving Small Business and a small business coach. Patricia helps business owners solve problems and develop strategy and goals to achieve objectives. Schedule a free 30 minute phone consultation with Patricia to see how Thriving Small Business can help your organization.