Budgeting is an important tool for a business so owners can make more informed financial decisions about the business. Benefits of budgeting for your business include:
Sets revenue targets
A budget can assist in setting revenue targets by simply adding a growth percentage to last years revenue. The growth percentage should be increased to reflect an increase in direct costs of the business to ensure the business maintains a consistent gross margin. In some circumstances the growth percentage should be increased to reflect increases in the indirect costs of the business. This could be appropriate where there has a been a significant increase in the overheads of the business.
Track your expenses and identify any unnecessary spending
Tracking your business expenses is an important budgeting tool as it allows you to review what you are spending the business’s cash on. This will allow the owners to make more informed decisions about the business’s spending habits and identify if they are spending too much on expenses which no longer provide a benefit or service to the business. This process can also assist the owners in deciding if they can afford to increase their spending in certain areas of the business without causing a negative impact on the cash flow of the business.
Allows you to review profitability and identify areas of improvement
Preparing a budget on the business’s income and expenses in turns allows you to forecast the business’s profitability which is critical to ensure the success of the business. Reviewing profitability allows you to identify areas of the business that need improving to ensure the business can return a healthy bottom line for its owners. A budget will help identify if income or expenses or both are the source of poor profitability and can allow you to then focus on the areas which need to be improved to increase the business’s profit.
Assist with planning the strategic objectives of the business
As mentioned above a good budget ought to project the profitability of the business and by doing so will allow owners to make more informed decisions about what direction to take the business in the future. This can include planning for future growth and identifying what roles and individuals are required to grow the business in the future. Another example of how budgeting can assist with strategic planning is whether a business can afford to purchase a commercial premises. A well-prepared budget ought to allow the owners to plan to save the funds required for a deposit on the purchase.
Once a budget has been completed it should then be compared with the business’s actual performance so owners can review the performance and identify if any changes need to be implemented. A budget should ideally be implemented each year however can be prepared more frequently should the owners require a more regular review of performance.
In addition to preparing an annual budget owners should also consider preparing an annual cash flow report to support the budget projections. Further, a business and marketing plan should also be prepared to align the objectives of the business for the next 12 months to the budgeted financial goals of the business.
Preparing a budget for the business does not only have to benefit the owners. Engaging employees in the budget process is a great way to improve communication in the workplace and ensure all employees understand the priorities of the business. By engaging employees ought to result in improved employee satisfaction which ought to lead to greater retention and productivity.
If you require assistance with preparing a budget for your business please contact Waterford Accountants.