Budgets Are Important

|by Shaun Ralph|Business Advisory

Why budget?

Planning

Combining past trends with realistic forecasts for the financial year, a budget provides a detailed view of assets, realistic revenue expectations, and how those balance against your anticipated expenses.

Budgets help with setting goals and establishing priorities. A budget should detail where funding will come from to execute new strategies and how much revenue that can be generated by executing the strategies successfully.

Businesses that rely heavily on seasonal sales revenue serve as a good example of why a budget is so important. If the months of June, July, August, and December typically generate 75 percent of your business' revenue, your budget allows you to plan ahead so that you'll have the best strategy for distributing that revenue most effectively over the course of a full financial year.

Planning also should account for long-term needs. If you anticipate a large expenditure one or two years down the road for computer upgrades, it's a good idea to start budgeting for that expense in advance.

Evaluation

In addition to being an important part of the planning process, budgets are necessary for evaluating the performance of your company over the course of the financial year. Part of budgeting responsibly is tracking actual revenue and expenses and comparing them to what was budgeted. This helps to assure that your business is sticking to its plans, but budgeting also offers an important means of identifying problems and opportunities.

For example, if sales in the first quarter are lower than what you budgeted, you'll know that you likely will have to find expenses to cut later in the financial year in order to stay profitable. A more positive example might be sales of a new product that exceed expectations. By tracking this trend and comparing it to what was budgeted, you'll know you have the additional revenue to perhaps revise the budget with plans to increase production or hire additional staff to handle the extra business.

TL;DR – Budgets are important, they help you keep in control of your cashflow, allow you to plan for big ticket items such as new as assets or an additional staff member. They also help you evaluate the performance of your company compared to expectations.

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