May 26, 2022

StrategisChhr

Skillful Business Crafters

Why Your Small Business Needs A Budget

President at BSM Accounting Services.

Budgets are structured financial plans for an individual or business. Given that we all have limited resources, small business budgeting requires critical attention and planning. Small business budgeting can help you make informed decisions, track performance and achieve business objectives.

Let’s discuss what a small business budget is and its importance.

What is a small business budget?

A budget is an estimation of target activities over a specified time. Conventionally, a budget is an estimation of income and expenses for a specific period. A budget can also be termed as a tactical action plan or as an outline of the strategic business plan.

Small businesses require budgets for various reasons. Small business budgeting entails controlling activities for different categories. You can develop:

• Cash budgets;

• Operating budgets;

• Capital budgets;

• Sales budgets, and so on.

Budgets can be devised in various ways. Every business has different budgeting needs. Thus, depending on the business’s resources, current position and target state, budgeting can take a different form for every business. Some common types of budgets include:

• Static budgets;

• Flexible budgets;

• Incremental budgets;

• Zero-based budgets;

• Value proposition budgets.

Why is small business budgeting important?

Budgets are just as important for small businesses as for large corporations. At the very least, budgeting will help you keep a track record of your revenue and expenses. To the surprise of many, simple budgeting can bring more immediate benefits than financial planning, forecasting and other detailed processes.

Having a budget allows you to:

Keep an eye on company objectives.

The biggest advantage of sticking to a budget is that it forces you to keep a close eye on business objectives. As a small business, you can use your budget to help guide your action plan and put you in a position to achieve long-term goals. These can be financial, strategic or operational goals. Use your budget as a road map in your tactical business planning.

Meet financial goals.

The most widely applied budgeting method is, of course, financial budgeting. Small businesses require a comprehensive and realistic budgeting process to meet their financial goals.

Divide your financial budget into daily, weekly, monthly and yearly plans so that you can achieve periodic financial goals efficiently. Budgeting in this way can help your small business achieve financial goals over the short and long term. Even for a new small business without historic data available, budgets can act as an excellent financial planning tool. 

Track your debt management.

Realistically, debt is an inevitable part of every small business. However, you can manage debts with controlled and planned financial activities. Budgeting is an effective financial tool to allocate financial resources precisely.

Track variances and adjust your budgets accordingly. Once your finances are under control, you can efficiently manage your business debts. Also, you can set debt management plans precisely through budgetary controls.

Conduct performance evaluations.

Many small businesses have limited human resources, but leaders can use budgetary controls to evaluate their employees’ performance.

For manufacturing businesses, these budgetary controls can be in the form of performance and operational budgets. For instance, set labor or volume budgets in a production facility. Another great way of utilizing small business budgeting is to evaluate business profit against budgets. Comprehensively compare revenues and expenses for each budget period. That way, you are evaluating operational efficiency and, thus, profitability of the business.

Prepare for emergencies.

Honestly, most of us have learned the lesson of preparing for emergencies recently and the hard way. Small businesses are particularly prone to external market factors such as economic recessions, political turmoil, pandemics and other macroeconomic factors.

Use your budget to help you live within your means while paving the way for business growth. Always create a cushion for emergency savings by allocating a consistent proportion of revenue to emergency funds without the need for borrowings.

Manage cash flow.

Cash budgets can help you track and manage cash flow, the lifeline of your business. Without cash budgets, small businesses would struggle to maintain day-to-day operations.

Most small businesses have limited cash flow. This means they need to deploy cash resources even more strategically. Cash flow management can lead to informed business decisions in terms of investing, financing, asset management and working capital management.

Allocate resources. 

Small businesses often have scarce resources. A structured budget that you stick to ensures that you never run out of the things you need to stay operational. For instance, a small business can be profitable but with limited cash flow. Study your budget to help you allocate these bottleneck resources efficiently. Apply budgetary controls broadly to help your small business achieve a state of efficient resource management in every department.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.


Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?


https://www.forbes.com/sites/forbesbusinesscouncil/2022/02/07/why-your-small-business-needs-a-budget/