The Importance of Having a Budget

The Importance of Having a Budget

The formal budget process is rarely undertaken by small and new business owners. They commonly find it “complicated” and “hard to start and stick to”. However, establishing a formal budget process and comparing the budget-to-actual results, on a both a monthly and annual basis, is essential for all businesses regardless of size.

What is a Budget and Budget Process?

The budget process is an annual (sometimes more frequent) procedure where the company’s business plan is constructed in the form of a financial statement, primarily an income statement.

A budget shows your company’s future plan, on a monthly or/and annual basis, for income, expenses, short-term obstacles, and long-term goals. Management members and other key company personnel (accounting staff, inventory managers, HR, etc.) typically create the budget and are involved in the budget process.

Why Does My Company Need to Create a Budget?

1. Easier to Scale Your Business and Team

The sooner you establish a formal budget process, the stronger the process will be by the time your business and management team grows.

2. Accountability

Budgets hold you and your team accountable by providing a measuring stick of where your company should be in relation to actual activity.

3. Identify Business Issues Earlier

The budgeting process helps identify red flags early (e.g. cash and inventory shortages), so management can find proper resolutions before they occur.

4. Get Everyone On the Same Page

Helps all involved with the budget process to understand the company vision.

5. More Informed Strategic Decisions

Sensitivity analyses can be conducted using your budget for a better picture of your future business and financial results.

If your business needs help developing a budget or creating scenario analyses, please reach out to [email protected].