A budget is one of the most valuable financial tools an entrepreneur has at their disposal. However, many businesses operate without a formal budget in place.
As small business owners, we tend to think budgeting & forecasting is too complicated and something for large companies with dedicated accounting and finance departments. We're busy with other tasks, and we don’t know how much money we're going to make next week, let alone in six months.
Creating a budget is critical for businesses of all sizes. Like it or not, budgeting is an all-important activity and not something you can put off until later.
Here's a sobering dose of reality for you. If your business currently has no working budget, you’re already falling dangerously behind, and you may not even know it until it's too late.
You’re Overspending And Blind To Potential Savings
Without a budget, it’s much easier to spend carelessly and lose track of your expenditures. A business with no budget is also vulnerable to surprise expenses and has severely limited ways of identifying wasteful spending.
Budgeting can solve these problems by forcing you to list all your expenses and take a hard look at everything you're spending. By closely monitoring your expenditures it's much easier to spot areas in your business where you can make valuable savings.
You’re Not Correctly Pricing Your Product Or Service
If you're unable to account for all of the expenses associated with each unit of product or service you sell, correctly setting your prices becomes very difficult. Your profit margins might be much smaller than you realize, or even worse, you may be losing money. The bottom line is, you can’t begin to price your business's products or services without a thorough understanding of the costs associated with producing them. A detailed budget identifies all overhead and production costs so you will know exactly how much to charge for your products or services to be profitable and grow your business.
Note - Overhead costs refer to all the costs of running your business like rent, salaries, & payroll costs, utilities, legal and accounting costs. Production costs refer to the direct costs associated with manufacturing a product or providing a service. They include things like labor, raw materials & supplies.
You’re Making Uninformed Decisions
Running a successful business requires effective decision making, and effective decision making requires detailed insight. Without a budget, you have little insight into your operations and making the correct choices becomes increasingly difficult.
Using a budget helps you better understand cash flows in and out of your business and gives you an idea of how much cash is needed to fund your current & future operations. By comparing your actual results to your budget forecasts on a month to month basis, you can also quickly identify problems areas in your business and start to take well-informed corrective actions.
You’re Turning Off Banks & Potential Investors
Banks & investors love excellent financial management. Running your business with a budget can help you secure a much-needed investment or bank loan. Without one, banks & private investors will have less confidence in your management abilities and have no way of evaluating your business's current status or future potential.
If you can show a well-devised & thorough budget, you're not only illustrating that your company is run like a well-oiled machine but also providing vital information needed to secure a loan or investment.