Running a small business in any economy is not for the fainthearted. There are one too many constraints and challenges to circumvent, and the only way to tackle them is to have the right systems in place. At the grass-root level, one of the best systems you can put in place is a solid budget.
This is because it is easy for business owners to get carried away by the noise of day-to-day activities and the challenges they come with. As such, they forget the bigger picture. Sometimes, the big difference between successful and unsuccessful businesses lies in how well they manage their limited resources. Knowing that one of the essential resources a small business can have is cash, a solid budget allows you to assess your financial position at all times.
What is a Budget?
In a nutshell, a budget is a financial plan for a specific time. It is an estimate of income and expenditure for a predetermined time. It involves tracking your income and spending and setting a few rules on your finances that constrain you from making impulsive financial decisions.
In creating your budget, it must be detailed enough to capture all the vital areas of concern but also realistic enough to work. A detailed and realistic budget is an important tool for businesses. This is because it provides essential information that ensures businesses have clearly defined knowledge of their operational requirements, financial capability, strategic focus and roadmap for anticipated future success.
Why your SME business needs a budget
A proper budget ensures that resources are available for initiatives that support business growth and development. It does this by defining available capital, estimating expenditure, and anticipating future revenue over a given period. Of course, setting the budget is not enough. The SME must be committed to the budgeting process and refer to its budget as a way of measuring performance against expectations.
It helps with both planning and control of the finances of the business. If there is no control over spending, planning is futile, and if there is no planning, there are no business objectives to achieve.
The budget provides a business with the roadmap and plans to:
- Control the finances of your business
- Ensure that the business can fund its current commitments
- Enable the business to meet its objectives and make confident financial decisions;
- Make sure that the business has money for future projects.
Budgeting is incredibly important to starting and growing a business and its benefits when running a business cannot be underestimated. Some of these benefits have been outlined below:
Budgeting provides a means of controlling income and expenditure of a business. Budgeting helps in directing both capital and revenue resources profitably.
2. Financial planning
Budgeting defines the objectives of an organization in numerical terms for a specific period. It also ensures that money is allocated to specific things that support the realization of the strategic objectives of the business.
It creates an environment of profit-mindedness throughout the organization. Budgeting is used to evaluate the policies and goals of an organization. Moreover, such policies and plans are tested with the help of budgetary control.
3. Effective decision making
Proper communication of the budget helps all stakeholders to understand the priorities and focus of the business. It generates a sense of caution among the line managers. It also guides management in the planning and formulation of policies.
Budgeting empowers the management to decentralize obligations without losing business control. This is because it involves management at all levels to participate in the goals setting.
4. Reveals loopholes
A good budget also discloses the weaknesses, inefficiencies, and deviations in an organization promptly and provides a means to overcome them. It ensures the availability of adequate working capital and profitably uses the capital expenditure.
5. Performance appraisal
It also provides a basis or yardstick that can be used to measure the performance of a department or an individual in an organization. A department that puts its financial resources to good use can be separated from one that is inefficient.
The benefits are numerous and cannot be overemphasized. Having a proper budget will help your business save and spend less. It gives you an overview of your business’ financial status and how to increase your earnings. All of which will, in turn, lead to the growth and development of the business.
This level of structured planning can make all the difference to the growth of businesses. The reason is that it enables business owners to concentrate their resources on improving profits, reducing costs, and increasing returns on investment (ROI).