Why Budgeting is a Business Must

Why Budgeting is a Business Must

Jan 17, 2013

If you have read this blog for a while you would know that I tend to write more about leadership than anything else. However, you will also hear me regularly talk about the limitations of leadership when you don’t have the resources required to execute. Understanding capabilities and setting budgets accordingly is key to continuing leadership forward and developing a sound business. That is why I wanted to share this post with all the business leaders and owners that visit this site.

No matter how good 2012 was, Let’s all aspire to have a better year in 2013.

In a matter of months, (sooner for some, longer for others) your organization will close the books on 2012 and start filling up a new set of financials for 2013. While the finalized statements of the years past is great for providing insight into what happened, it is equally important to start the planning process for what is to come in the year ahead.

I can’t tell you how many businesses do not prepare a budget for the year ahead. Others may prepare some type of budget, but it is done with minimal thought at best. Often this half-baked budget is nothing more than a document required by a bank or financial partner.

But a budget is more important than that. It is key for a company to engage in the necessary planning process to make sure they are ready for what the year ahead brings.

Of course, I have heard budgeting is a waste of time because no organization (big or small) knows what their sales are going to look like, or that it is just too time consuming for a small organization. These are merely excuses.

Here are seven reasons why creating a budget is well worth the time.

Margins
This has to do with looking back and then looking ahead. We all know that key areas of our businesses are seeing change in profit margin. This is common, but every percent of profit can have a massive impact on your profit on sales. Seeing how much profit you estimate creating based on your sales forecast. This top margin line will help better set your expense levels for SG&A [Selling, General and Administrative Expenses].

Suppliers
The budget process provides an opportunity to review revenues from the past year as well as projected revenues with key suppliers. Given that our suppliers are key to our business performance, this information can be leveraged to have more meaningful conversations with this group of partners as the year gets started.

These discussions can be to work on pricing, discounts, terms or other mutually-beneficial agreements. Too many businesses wait for reason to speak with their key suppliers. It is always better to do this early, often and before you need them.

Trends
Since budgeting is done based on the year(s) preceding, it provides a wonderful opportunity to look at business trends. whether it be margins or a surprise increase in contract labor or software expense. Spotting trends in revenue, profit and expense provides a chance for a business to put a stop to those that are troublesome or capitalize on those that are beneficial.

Investment
It is more important than ever that businesses are in their employees. This means hiring, education, trade shows, online learning and other hands-on training. Small businesses, as a whole, are awful at investing in their employees, primarily because time and resources are rarely available. But with the economy we are in where we are so invested in our employees, it is the continued education and investment that will often keep them with you. When you budget, set aside monies to handle this area. Call it learning, training or whatever you like. I like to call it “Retention” and it must be in your budget.

Taxes
It is timely for this particular conversation, but regardless of the fiscal cliff, your business has a tax liability it has to meet. Making sure you know when your business taxes are due, you need to 1) plan for the cash flow to meet those payments and 2) see what the impact will be on your bottom line.

Benefits
Perhaps these are right there with taxes, but benefits tend to sneak up on businesses every year. And the “up” has to do with the prices increasing. But benefits are a crucial component to recruitment and retention. It is important organizations understand the impact that continuing to provide benefits has on the business. A small percentage increase in benefits can be a large dollar increase to your expenses. It is best to sort this out early.

Financial Requirements
The budget is the time to see what financial gaps your organization may have. Whether that is from quickly growing revenues, declining margins or seasonality, the last time you want to be out there trying to find additional financing is when your business really needs it. A well created budget based on solid information and forecasts allows for this to be identified early and for the appropriate discussions to take place before they become a requirement.

This post was originally published in Commercial Integrator Magazine and can be found here.

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  1. […] Budgeting is key to running a successful business. It isn't voodoo or black magic but a means to running a better business and being a better leader.  […]

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