A Budget can take a lot of thought, time and effort to put together, but it’s importance for small to mid-sized businesses cannot be under estimated. A budget is a tool to help you accomplish many things and help you take control of your finances. Many times, lenders will require an annual budget from their debtors to show projected profitability and how the debt repayment structure is effecting the business operations.
One of the main purposes of a budget is to control your spending. With budget to actual comparisons you can see what your actual expenses are in comparison to your planned expenditures. It is best to address over expenditures early on before they are out of hand. If you are running short of cash often, the reason can be found within these comparisons. Presenting a budget to company managers can assist them in operating within the guidelines established by business owners and executives.
Another reason for budgeting is to give the business owner the pathway to reduce debt. Planned debt payments within the budget can provide a visual on how the future debt payments will affect the cash flow of the business. Deviations from the plan can be noted and explained to lenders in a timely manner.
Some companies utilize a budget to allocate resources at the beginning of the year. A budget can assist a business in a decision as to which activities will provide a greater return and may spur the addition of additional resources towards a specific direction or department.
Budgets can also be used to measure employee performance based on variances, some companies will also reward employees for positive variances which add to the profitability of the company. Care should be taken in these type of circumstances as budgets can be modified to make personal objectives easier to achieve.
For larger well established businesses an annual budget may not be as useful if a consistent track record of performance already exists. A rolling forecast that is updated on a regular basis may be a better approach financial predictions, this would also allow the business to shift its operational focus on shorter notice.
Your B2B CFO® partner can assist you in creating and monitoring your budget. They are experienced financial experts who can assist in the growth and success of your business.
Partner, B2B CFO®