Have you done your due diligence and looked over what your budget is expected to be next year? Are the funds in your bank account going to work with everything in your proposed budget? Even for the most experienced CFO, budget time can be frustrating and monotonous… but it must be done. So, buckle up, we’re going on a budgeting adventure.
First of all, a budget is very important for your business because it will give you the insight to asses overspending and really dive into potential profitability all the while ensuring your bank account agrees with the budget. When you begin going over your previous budget or create a new one, make sure you are working with correct figures. There is no point to a budget if you are simply guessing. Dive into your finances, audit accounts, and really get to know your quick books. This can be time-consuming but it will be worth it to ensure accuracy. Don’t depend on your accountant completely, every business owner is more successful when they know the tools and have the financial skills. Accuracy in your budget will allow you to see a few main things once your budget is complete. It will allow you to understand how many sales you need to be profitable, how much money you could possibly re-invest in your business, as well as the potential to hire employees. If you plan on seeing your business grow you will have to give creating a budget a shot.
What should be included in the budget? Luckily most of these figures can be easily accounted for if you use a software program to track your business’s finances. Also, if you have an accountant, all of these items will be clear and easy to find. First, you will need to create or look at an existing profit & loss report. This should include income, expenses, depreciation, overhead, payroll, and debt repayments. By looking at all of these figures together you can see if your business is assisting your bank account or hurting it. Another major benefit of a budget is showing you exactly where the revenue is being spent. Perhaps you are losing money, but you realize that your debts are being paid off quickly. Perhaps the losses are not sustainable and it’s time to re-evaluate strategy. This is why a budget is necessary.
Next is taking look at your balance sheet. This is going to really let you know if your bank account and budget are working together. This will tell you the difference between what you owe and what you own. This should include; cash in the bank, unpaid invoices that have been sent to clients, as well as business assets. The total of these items is to be weighed against business liabilities such as your business’s bills, taxes, and debts. With all of the things accounted for, you should have a better idea of where you want to go with your budget and if that’s possible for your business.
Finally, you can use that budget to test out possible scenarios. When you do this, you want to look at the good, bad and ugly. Anything can happen in a year, especially in business. What if you increase sales? What if something breaks? What if you lose your biggest client? Obviously, an increase in sales is a much better scenario than the latter, but it always pays to be prepared. You don’t want something unexpected to hit you hard and potentially ruin everything you worked so hard for. The same goes for having a budget in general, if yours is outdated or non-existent it is time to change that. Overall, your bank account may not agree with your budget, but as long as you are working in the right direction to rectify that, your business can only go up from there.