Every January, business owners everywhere, including you, decide that this is the year that you want to experience growth in your business. This is the year you will hit $100,000 in revenues, or maybe $200,000, $500,000 or even $1,000,000.
But, how will you get there?
The only way you can get there is to create a plan. And, the first step of that plan is a budget.
It is critical that you prepare a budget for your business every year. Regardless of how large or small your business is, a budget is the one thing that will help you experience growth and profitability in your business.
Here are a few reasons why a budget is essential for success in your business:
It creates structure. In simple terms, a budget is a plan that tells you how much money you plan to make and what you plan to spend it on. It is the financial tool needed to help you reach your goals. A budget displays your expected results numerically. And, by documenting it, you can see in black and white whether your financial goals are realistic and achievable.
Think of your budget as the foundation of how your business will perform in the upcoming year. This foundation, or your budget, is the basis for what everything you do will be based on. It will help you determine what your pricing needs to be for your services. It will also help you determine what you can expect to spend on marketing costs that will generate leads. And, it will help you ensure that your offerings generate a profit.
It holds you accountable. Your budget is your accountability partner. Because you are aware of your numbers you expect to generate and spend, you are more inclined to monitor and track them on a consistent basis. Having them constantly in your face ensures that your goals are met and your business is operating, as planned.
It saves you money. Having a budget prevents you from overspending. When you input your budget into an accounting system, such as QuickBooks® Online, you will be able to track how much you are spending in your business, compared to your budgeted plan. Without a budget, you are more likely to spend money whenever, wherever and however you please. The result of these actions can lead to unmanaged costs and low cash flow.
With a budget in place, you will be able to control your spending over what you need to spend to create your products and services, as well as what you must pay for overhead expenses. Listing out of your expenses forces you to take a hard look at the things you are paying for and recognize costs that you may not really need, or could find an alternative vendor source for.
It helps you make better business decisions. Having a budget in place ensures that you monitor your numbers regularly. It puts you in tune with your sales and your costs associated with these sales, as well as your marketing, payroll, inventory, fixed assets and cash flow, all of which are needed to keep the business going. Knowing your numbers allows you to make informed managerial decisions based on solid facts, not fabricated ones. With a budget in place as a starting point, you will be able to adjust future months, as needed, to ensure that you still meet your overall goal.
Your budget will include a detailed breakdown of each revenue stream in your business, and what percentage of your revenue it generates. It will also have a detailed breakdown of the costs your business will incur, and the months you expect them to occur in.
Understanding the importance of budgeting is just the tip of the iceberg, but how do you create one? Here are three easy steps:
- List ALL of your monthly expenses. There are so many costs built into a budget. And, often, people budget for the big items but not the little incidentals. It is those little items that can cause you to blow your budget. So, don’t forget about the little expenses, such as office supplies, internet fees and event parking.
- Determine your monthly income. Most business owners, well people in general, budget for expenses. No one ever thinks about the revenue. To have a complete budget, you must factor in the revenues and the expenses. If you only budget for the expenses, you are already at a loss.
- Track it. Whether you maintain this budget within your QuickBooks Online file or in an excel spreadsheet, it doesn’t matter – just track it somewhere. Don’t create a budget and then try to manage it in your head. It won’t work. You can’t remember it all. Compare your actual figures against your budget. As I said before, monitoring your spending will help you better manage your cash flow.