Creating budgets and financial plans are vital to a business’ financial success. Some key components of successful budgeting for your business entail knowing where you are financially in your business and where you want to take your business to, also known as forecasting. Budgets are commonly prepared for all sizes of businesses, however not enough small to medium size businesses are budgeting.
I get really excited about business budgets and creating financial plans for businesses, because this is the area that map out growth strategies and plans. When you put that plan down on paper and work through it and see that plan come to life, it gets exciting, and you can really see what direction the company can go in.
Opportunities and growth can be endless.
When you create a business budget and financial plan for your company you can plan out the target sales and the profit expected each month. This is the best way to manage your net profit margins and keep your business aligned with the targeted net profit margins.
What is the purpose of a budget?
In my opinion, the main purpose of a business budget is to create a plan for your business for the year. The business budget serves as a roadmap that offers goals and direction for a business to go in.
I often say, “A goal without a plan is just a wish.” When you have that business budget prepared and ready to implement, it helps the business stay on track, course correct, and reach its’ goals.
Why are budgets useful in the planning process
Business budgets and financial plans are so useful in the planning process because they help you map out the financial goals for the business and see what is possible. The transformation for the business owner when they are creating the budget is priceless.
Business owners often know what they want to achieve in their business but doubt the possibility because they don’t have a clear plan. The planning stage offers a great opportunity to examine the prices and pricing strategy in your business.
What is the first step in setting up a budget
The first step in setting up a budget for your business involves evaluating where the business is currently at, financially and operationally. Knowing how much revenue to expect each month and how much you spend in expenses each month is a start.
Break out your budget for the next 12 months. For example, if you are starting your budget with the calendar year, you would start at January. Map out January as a month you would expect to it to be at based on previous months (and years) activity.
Repeat this for each month of the year.
The main parts of a budget include:
Revenue
If you have different revenue streams, be sure to break out the revenue categories and budget for them separately so you can closely monitor the performance of the revenue streams each month.
Expenses
Each expense belongs to its own category (ie. rent, office expenses, payroll, etc). Be sure to not only plan out fixed monthly expenses but plan ahead for annual payments and expense increases such as payroll.
Net income (profit) before taxes
You will also want to target your profit to be consistent with the profit margin. This is a vital area to budget for as you want to ensure your profit levels are healthy. You don’t want to be operating at a loss, so if you need to increase revenue expectations or decrease expenses, or a combination of both, you can play around with the numbers to get you to a healthy profit before taxes.
Net profit margin
Use your industry standard net profit margin as a standard. You will need to research what the industry standard is and ensure you are either meeting that or exceeding it.
Why is it important to have a budget?
It is important to not only have a budget created for the business, but it is critical to measure your progress against that budget or financial plan. When you monitor the performance, you are ensuring that profitability in the business materializes.
Businesses are in business to make profit, and profit monitoring is vital to ensure you are building a viable business.
The bottom line is not having an annual budget in your business is like driving blindfolded. You won’t know where you are going, and chances are you’ll drive your business in the ground. When you have a clear budget, it gives performance expectations for the business. It gives clear direction and goals and makes management accountable to those goals.
Even if you are a solopreneur, you need a budget to make yourself accountable to achieving those goals. Without the direction it would be hard to achieve those goals.
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