The Importance of Budgeting: Why You Need One and How to Stick to It
Entrepreneurs run the gamut of personalities just like everyone else, from incredibly careful planners to scoundrels and gamblers, but it’s surprising to find out how many businesses aren’t budgeting properly. A new survey from Clutch has revealed that close to two-thirds of businesses didn’t establish an official, documented budget last year. It’s not a terribly unusual phenomenon — while people who open small businesses are traditionally creative, inspired and ambitious individuals, they’re not always the most detail-oriented people in the world.
So if you’re reading this, take note: budgets are not only a critical element of opening up a business, but they soon become essential. Here’s why.
What’s the Budget For?
We get it. Running a business, any business, is a challenging enterprise. But a budget gives you a mechanism by which not only to keep the business on the rails, but to adjust operations if it looks like specific aspects of operations are affecting the bottom line, whether it’s marketing, distribution or customer service. Here’s what a budget is for:
- The budget helps the owner/owners control the finances of the business.
- The budget ensures that the business can not only meet its commitments, but is also honoring its own relationships with vendors and employees.
- The budget is a seriously important tool for decision-makers, investors and other constituents to make decisions.
- The budget makes sure that the business has money for its future plans, whatever they may be.
What are the Benefits of Budgeting for a Small Business?
First, let’s start with the bottom line. In 2018, half of the small businesses who had a budget met their sales targets. More than 10 percent were under budget, and nearly a third spent more. Remember the golden rule: The Small Business Administration’s statistics say that 30 percent of new businesses fail in the first two years of being open, and half within the first five years. Any advantage you can give yourself in terms of planning and infrastructure, as opposed to daily operations, is a good thing. Here’s what you get from investing in budgeting:
- Budgeting is a tool to engage your leadership team and a process by which to not only highlight the strengths and weaknesses of the business, but also to field ideas on how to do better.
- Budgeting ensures that not only are the primary needs of the business, like payroll, supplies, etc. are being met, but the budget is also serving the strategic objectives of the business.
- A budget that is communicated articulately to employees helps everyone understand the strategic objectives, as well as the priorities of the business.
- It’s great to have a vision, but engaging your team in reviewing and comparing the budget with actual numbers might not only reveal information that highlights the strengths and weaknesses of your business, but also elicits ideas from your team as to how the business can get better.
How Do We Stick to the Budget?
Just like being on a diet, sticking to a business budget is the tricky part. Here’s the short list: set goals, keep an eye on those goals, review your finances regularly, cut costs where you can, and shop for suppliers when you can.
You can also check industry standards to see how you’re performing compared with your peers. If you’re running a business in a specific region, call up a peer who runs a business across the country to see how they do it. Lastly, give yourself some rope to change. It’s easy to be rigid and demanding in order to hit sales goals, but things change. If you sock a little cheddar away and give yourself some slack, you might get the opportunity to expand the business or add new employees who can help you gain even more success.