We've all heard the saying "You need to spend money to make money", but without proper budgeting and financial planning, businesses can end up overspending and amassing too much debt, making it difficult for them to achieve their financial goals. A budget keeps you accountable and on track to reach these goals, outlining all of your expected income and expenses for a particular period so that you can allocate your resources more efficiently.
If you are a business owner, you need to make sure that you have an effective financial plan before you start spending.
Here are some of the major benefits of creating a structured budget for your business.
Achieve financial goals
Every business owner has aspirations for their business, but without effective financial planning, the journey towards reaching these goals can quickly become a slow grind. Whether you want to open a flagship store for your e-commerce business or expand overseas, proper budgeting allows you to allocate resources more efficiently to ensure that you have enough funds to support the next stage of your journey.
A budget outlines the actions that you need to take to achieve your financial objectives, from identifying cost savings opportunities to limiting overspending in certain expense categories. The most effective way of identifying these actions is by using a 3-way model that looks at not only your budget, but also your forecasts and your cash flow for the period as well. When combined, these three financial planning tools create the ultimate framework for planning, re-evaluating, and managing your business effectively.
Prioritise expenses
During different stages in the life cycle of your business, you may need to prioritise certain business activities, but you may not have the cash flow to support additional spending. If you have built in a forecast to your budget model, you will have a much more accurate sense of where your budget needs to be spent, allowing you to make better use of your existing resources by allocating them more effectively.
When it comes to creating your budget, you may discover that during the previous period you were over-allocating resources in a particular expense category or that certain expenses can be reduced moving forward. By using your forecast to determine your high priority activities for the period, you can divert the excess from other categories to the areas of your business that need them the most. When prioritising your spending, it is always important to consider both your budget and your forecast in your financial plan.
Related: How To Ensure Your Variable Expenses Don't Drown Your Business
Effectively manage debt
Debt is inevitable for most businesses, especially for startups or small to medium businesses (SMBs) that have limited capital or uneven cash flow. When growth opportunities present themselves, it can be easy for business owners to overextend their credit and take on too much debt.
Effective cash flow management is the key to managing and settling debt. Your budget needs to take into account the inflows and outflows of your business to ensure that you have the cash to meet each of your payment deadlines, especially when it comes to larger expenses. Missing these deadlines or failing to manage your debt properly can lead to late payment penalties and additional interest, further compounding your debt obligations and making it even more difficult for businesses to keep their head above water. Always outline clear payment plans in your budget to get ahead of negative cash flow and stay prepared for your payment deadlines.
Prepare for emergencies
While most expenses can be forecast and accounted for, unexpected external factors, such as economic recessions or, as we have experienced in recent years, a global pandemic, can cripple a business. Small businesses in particular are especially susceptible as they are often forced to borrow money, which further adds to their debt obligations.
An effective budget should set money aside in an emergency fund, so that, in the event of an emergency, you do not need to reactively divert funds from another business activity. Having an emergency fund will give you the financial flexibility you need to keep your business operational during periods of instability. Taking a large financial hit is never easy, but the security of having funds set aside is something that cannot be overstated when structuring a business budget.
Related: How to improve your Business Cash Flow during periods of instability
Make informed financial decisions
Business owners are often faced with difficult decisions that could make or break their business, especially when it comes to allocating their financial resources. It is always important to have as much information as possible when making these decisions and to consider how your operations may be impacted. A 3-way financial planning model can help you better understand the implications of your decisions, from how it may affect your debt obligations, to whether it will divert resources from your high-priority activities.
For example, you may want to reward your employees with bonus payments. However, your budget may not allow for the additional payroll taxes in the current financial year. By deferring your bonus payments to the next income year, your employees are still rewarded, but you have reduced your tax liability for the current year.
What does this mean for my business?
As a business, yes, you do need to spend money to make money — but setting a budget, along with proper forecasting and cash flow management, will ensure that you are spending your money in the right places, at the right times, and on the right things. Your business can only go as far as its resources allow, and effective budgeting keeps your operations fueled and your debts in check.
If you need assistance with budgeting for your business, Azure Group has the knowledge and expertise to help you develop and implement an effective financial plan. Our experienced team has developed a highly sophisticated financial modelling system that can be modified and scripted to suit the complexities of your business. To learn more about how we can help you, contact us today.
Have you Have you noticed our #FridayExpertTips... here's one that relates to #Accounting
“Good cash flow forecasting gets more accurate over time: the most important things to do, like most things in life, is to start.”
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