Importance of Budgeting
Align: Monthly Business Tip
Research has shown that only small percentages of business professionals think about the future of the companies they work for. Imagine that. They are so busy in the daily grind that they forget to properly plan for growth. In fact, working with small business owners, I have noticed that many of them do not complete a budget for the upcoming year and cringe at the thought of creating one.
Avoidance of this annual task is not isolated to the business owner. I have also found that many leaders within larger organizations try to avoid the budgeting process at all cost (no pun intended). Think about the budgeting process as an essential part of that planning process. If you don't know where the company is headed, then how can you properly plan?
Keep It Simple:
If this is your first time, do not get overwhelmed by the thought. Budgeting is an important and necessary step when planning the year. Here are some quick tips for preparing a budget for business owners:
If available, use this year as a benchmark. If there is no benchmark year, simply create a realistic projection of both revenues and expenses.
It does not have to be an extensive budget. Start out basic. Create two sections in a simple excel spreadsheet:
There should be enough details to understand how the business will perform financially.
On the simple spreadsheet, breakdown both revenues and expenses on a monthly basis.
Each column and row should have totals.
Create a simple formula to check the difference between revenues and expenses to ensure the company is not overextended.
If you have accounting software like QuickBooks, there may be a budgeting tool in the system. Use it. Most of them are user friendly and will prompt you through the process.
Or maybe the simplest tip, invest in your business and hire an accountant to assist you with creating a budget.
Thoughts To Consider:
What are the company's revenue sources? For example: A lawyer who practices family law, may have revenue coming in for divorces, document prep, or custody matters. Think about all revenue sources for the business. Accounting for each one separately will help track performance in each area.
What is a realistic financial goal for the year and does your budgeted revenues reflect that potential?
What are some expenses the company will incur for the year? Account for fixed and variable expenses. A fixed expensed would be something like rent or annual membership dues. A variable expense would be something like utilities that flex depending on usage.
Ensure the budget incorporates educational or training opportunities for the year. For example: the family law attorney needs Continuing Legal Education (CLE) courses every year. So don't forget to budget for personal and professional development. What training is required throughout the year? How many courses will you take? And what month are they being offered?
Account for the expenses in the appropriate month they will incur. If you have team members, get them involved. Ask them to research training opportunities that would enhance their abilities and incorporate their development into the company's budget too.
If you are part of a larger organization but do not play an active role in the budgeting process, it is still equally as important for you to understand how the budget will impact your respective area. Here are a few reasons why:
If you are part of the process, you will be able to have conversations with the finance team to maintain financial resources for your departmental needs.
Ensuring that you know whether or not there are substantial financial changes coming for the new year, will help you plan for the team's success.
Understanding the financial state of the company also indicates to upper management that you are invested in the company's overall performance.
Budgeting does not have to be a bad word that makes you cringe or a daunting task that looms before the new year. Budgeting is an important part of the process that enable leaders to make informed decisions about the direction of the company.
Stay connected for next month's business tip to help understand how a company's budget can be used for planning goals for the business.