Many business owners fail to set a budget and don’t consider this to be important for them. They either think they are not big enough to need one or they have one ‘in their head’. So, why is it important for every business to set a budget?
A budget is the success plan for a business. As the famous proverb says: ‘Those who fail to plan, plan to fail.’
A budget helps you plan to reach goals within your business, making sure you are earning the income you want and are in control of the costs related to that income.
Firstly, you need to know how many items/hours you must sell per month to reach your goal income. This is phased over a 12 month period. If you are currently not able to work out this part of how you will earn your goal income, then you are not setting your business up for success.
Secondly, you need to match the costs related to your goal income in order to achieve that goal. If you’re a service based industry, you will have direct costs related to each hour that you charge out. You need to work out exactly how much each hour actually costs you i.e. subcontractor/staff costs, rent, electricity and other regular costs such as subscriptions and memberships.
By having a firm plan in place you can easily see, over the year, in which months you are making a profit and you can track this against each individual month to see how your business actually performed in relation to your budget. When you are able to see what you planned and what actually happened, you will then be able to easily identify any differences – where they occurred, why they happened and how you can adjust your budget or spending to get on track.
As the business owner you know your business and can come up with the answers you need. You are the one who will know if there is a seasonal impact, a change in the economy, or any other relevant variables.
Remember, if you do not have control over your costs you won’t know if you are on track to your goal profit. A budget also helps you to identify the standard for cash flow within your business. You cannot maintain cash flow without setting a plan in terms of what is happening with your income and expenses.
So setting a budget is really important for making sure you achieve the profit and obviously the cash flows that you want in your business.