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Why You Really Need a Budget: Why do we even need one?

You may be wondering why you need to create a business budget for your small business. There are many reasons as to why this is necessary, but the two main reasons are that it provides a blueprint for success and an accurate measure of how we are performing on a year-by-year basis. The budgeting process also starts the cash flow forecast, which is an important piece of financial scenario planning for any company!

Why You Really Need a Budget: Why do we even need one?

You may be wondering why you need to create a business budget for your small business. There are many reasons as to why this is necessary, but the two main reasons are that it provides a blueprint for success and an accurate measure of how we are performing on a year-by-year basis. The budgeting process also starts the cash flow forecast, which is an important piece of financial scenario planning for any company!

What is a business budget?

A business budget offers a picture of expenditures including fixed costs and revenues that should be used to help make big decisions such as whether to increase marketing, cut expenses, hire staff, or purchase equipment. It also frames your organization's financial and operational goals so it can function as an action plan for allocating resources while evaluating performance.

What is Business forecasting?

A business forecasting model is a method to predict the future. The technique combines information gathered from past circumstances and an accurate picture of the present economy to predict future economic conditions for a company.

Business forecasting is used to predict how the economy will turn out in the short term. It is an essential component of decision making for organizations, as it allows them to focus on what may happen rather than what will likely happen.

Why does a business budget so often collect dust?

A business budget is all too often created in a spreadsheet, around the time of your end of the financial year or when you’re just getting your business off the ground. They support you at the time, but once filed away they are rarely referred to again. This is usually because they’re not visible on a daily basis. They sit on a virtual shelf in your computer or if printed are lost under piles of other paper.

How can we change this? By using a system that works for you, not against you.

Spreadsheets appear ‘easy’ at first because they are familiar territory, and if you love working long hours on administrative tasks, such as updating the ‘actuals’ in your accounts package with your offline spreadsheet, then this could be the best route for you. But if not, then now is a good time to consider the value of your time to the business and where it is best invested.

The difference between a budget and a business forecast

In essence, a business budget is a quantified projection for what a company wants to achieve, whereas a financial forecast is an estimate of what will actually be achieved.

The business budget may only be updated once a year, but it stands as a benchmark indicator with which to compare actual results and to highlight variances from expected performance. It represents a detailed record of the financial position that owners and management want to achieve during a certain period of time.

A business forecast, in particular, a cash flow forecast, is all about now, not what you thought you would achieve at the time that you prepared your business budget. It can be referred to and relied upon to help make business and operational decisions, such as adjustments to staffing, inventory levels, and seasonal promotional opportunities. It serves an integral role in the day-to-day running of a company for business owners.

Don’t stop at the budget, use this as a launchpad

It is important to remember, however, that due to the longer-term nature of a business budget, it may contain targets that are simply not achievable. Either they were unrealistic from the outset or market circumstances may have changed to make them no longer viable. This is why we recommend you get started with budgets to articulate your plans for the business in financial terms.

Keep budgeting and reporting against these variances, but this is where your scenario planning and cash flow forecast comes into play. Use them, copy them, play around with them, set what-if expectations and think through all possible outcomes. Don’t rely on the budget alone. Use it as a guide, and be sure to tweak your business forecasting daily to make sure that it always tallies with current market activities.

A business budget should help small business owners to steer the company towards growth by pinpointing fairly accurately where income, spending and profit stand versus monthly and yearly targets. The best way to do this is to use sales, cost and profit data from past years as an accurate starting point to budget for the coming year.

For all business startups, however, there is no historical data reporting with which to base a business budget, which means figures for sales, costs and profit are based purely on estimates.

In this scenario, the figures you use should reflect your business goals and ambitions. If you have no experience in your marketplace, be sure to do your homework. Research the market in detail, find out about your competition, and most importantly, be realistic.

Dynamic business forecasting with Futrli

It is always good practice to plan for both best-case and worst-case scenarios. That way you can be sure to always be prepared for whatever the market or life throws at you.

Wouldn’t it be great if you could have limitless P&L, balance sheet and cash flow business forecasting scenarios, and be able to visualise and compare these outcomes side-by-side? Well, we thought so, so we set about creating dynamic scenario boards tailored to your business so that now you can benefit from a 360º view at all times.

But in all of your scenarios, don’t forget to factor in yourself! One of the biggest mistakes small businesses owners make is to forget to incorporate their own time. Time is money, especially when working with people who are paid for their time, so be sure to treat your time like your money, and set external deadlines later than when you think the project will actually be done.

9 points that your budget should include

Don’t leave your annual budget to the end of the year. Keep regularly updating it on a month-by-month basis, making sure to adjust monthly predictions if your business is likely to experience seasonal sales peaks during the year.

This helps to focus your mind on costs, reminds you of business issues and gives you an accurate snapshot of how the company is performing against targets. For long-term financial planning, quarterly budgets are more useful.

A clear and precise annual business budget should include the following:

  1. An outline of changes that you want to make to your business
  2. Potential changes to your market, customers and competition
  3. Your objectives and goals for the year
  4. Your key performance indicators (KPIs)
  5. Any issues or problems
  6. Any operational changes
  7. Information about your management and people
  8. Your financial performance and forecasts
  9. Details of investment in the business

Collaboration is key

A business' total operating budget is likely to be made up of several individual budgets such as marketing, sales, and operations.

Business owners can create a budget to track their own sales figures, fixed costs, profit margins and business growth through forecasting and content measurement. This is the perfect opportunity to ensure managers are taking ownership of their departments and ensuring that they stay accountable for all of these measures.

Budgeting is the starting point for (what we believe to be) an even more important measure of success, your cash flow forecast; a vital piece of financial scenario planning for any company.

The budget should reflect each department and expenditure from different departments in order to present accurate figures that show what has been achieved

Sharing figures and collaborating on outcomes helps your employees feel as if they are a part of the business and its success.

And don’t be afraid to ask your accountant to help you prepare your business budgets, although it is important that you also have a good understanding of how they are put together. You must always take time to monitor how well your business does against the prepared budget so that you can track whether or not it is achieving its goals and remaining profitable even with fixed costs.

Doing your research and long-term planning can help you be a successful entrepreneur. To do this, it is important to create an annual budget that will provide all of the necessary information for monitoring how well your business decision is working out in terms of profit margins as well as company expenses such as payroll or utilities so that at any point if needed adjustments need to be made then they can happen quickly with the minimal financial impact on the organization's bottom line.

A Business budget and business forecasting allow companies owners like yourself to monitor their finances and product development more effectively by giving them essential details about what’s going on behind closed doors within both operational costs and revenue.

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