Budgeting is crucial to the continuity of a business. In order for any business to function, debts and other obligations must be paid in a timely manner. The only way to reliably satisfy the business’s recurring debts, and to plan for expansion, is to budget.
A budget not only helps with short-term planning, but it also acts as a tool to prepare your business for a financially-sound future. You can take a step further and compare your budget to your actual expenses in a budget v actual report, or use it to calculate cash flows.
In this article, we will explore why budgets are important, helpful information about the budget v. actual report, and how a budget can help you better manage your business while increasing your bottom line.
Why Budgeting is Important for a Small Business
Budgeting is one of the most important drivers of success in a business. A budget is more than a report that tracks your income and expenses. In the following list, we will go over the top three reasons why budgeting is important for a small business:
Business stability. A budget helps you plan so that you’ll have enough cash to support business operations. Having your finances planned out puts you in a position of power. If your business finances are not where they need to be, you can take steps to bring in more cash, whether it be through financing, increased sales, or decreased expenses.
Get Funded. In the event that you decide to seek outside funding via creditors or lenders, a budget will help you to clearly convey your business’s financial state. In general, a budget is a mandatory requirement to secure financing or investment, as it allows lenders to understand how the funding will be used.
Goal Setting. Having a budget helps you to set business goals. Budgets can be manipulated to simulate various financial scenarios, such as when your business will break even. If your budget reveals that you’d be able to break even by lowering your expenses by $5,000, you could turn this observation into a business goal.
Create a Budget Versus Actual Report Once your business budget has been created, your online virtual bookkeeper can provide a budget vs. actuals report with your monthly financial statements.
A budget vs. actual report gauges how well you budgeted during a certain time period. The report shows you the difference between what you budgeted for and the actual income and expenses. This allows you to make adjustments in future periods to help meet your goals or change your projections.
Budget to Calculate Cash Flows
You can also utilize budgeting to make sure you will have adequate cash flow in the business.
Using your budget to calculate cash flow will require coming up with an estimate of how much money is expected to come into, and flow out of, the business during a specific time period.
Calculating your cash flows will require you to take the following steps:
Choose a time frame for the budget.
Come up with an estimate of sales.
Predict when the money from the sales will come in.
Factor in your expenses and determine whether you’ll have enough cash to cover business expenses.
An equation that you can use to determine cash flow is:
Net Cash Flow = Cash Inflow (Income) - Cash Outflow (Expenses)
Now you know why budgeting is important, and some ways that it can support your business’s financial success. We hope that this article serves as a guide to help you with your budgeting endeavors!
We are the outsourced, virtual small business bookkeeping experts. Call us today for a free business consultation so you can get back to running your business.