No matter what stage your business is in, it is important to create and manage a budget. By creating a budget, your business will be able to plan for both future growth and unexpected decline.
In today’s economy, a business must always be prepared for the unexpected and should never be without a working budget.
Why a budget is important
Budgets allow a business to create a financial roadmap by setting goals and working to achieve those goals. A budget will help a business to determine priorities and therefore better control spending, which ultimately leads to higher profits. Also, a budget will allow a business to be better prepared for large capital expenditures and to help identify new investment opportunities.
A business that does not have a budget runs the danger of being unprepared. If a business does not build a cushion for unexpected expenses and investments, it runs the risk of not being able meet those obligations when they come due. Also, without a budget, a business risks having expenses eat too much into the revenue, therefore reducing its profit, and possibly putting the business itself at risk.
How to set up a budget
To set up a budget, a business must simply identify its expected revenue (cash coming in) and expenses (cash going out). This may be able to be done within the company’s accounting software, or a simple spreadsheet may also be used. A great starting point is to use past financial statements, and then modify accordingly for estimated future differences. Businesses should also consider unusual expenses, large capital expenditures, and inflationary effects when setting up a budget. It is important to be conservative and build a financial cushion into the budget to be prepared for the unexpected.
Mistakes when making a budget
A common mistake businesses make is not consistently updating or reworking the budget. It is important to periodically consult the budget throughout the year to make sure the business is staying on track with its goals, and adjusting the budget for unexpected expenses. Another mistake businesses make is not being realistic with the budget. It is crucial that businesses set realistic budgets, and an outside CPA can help with this. Don’t be afraid to contact your CPA for help creating and updating your budget.