Many business owners go through life without exploiting the power of budgeting in their business. Simon Hilton explains why it’s worth taking the time to prepare a budget and the many advantages it has.
A budget, or forecast, is a forward looking document. It reflects the financial agenda and desired outcomes for your business into the future. ‘Budget’ can sometimes be a dirty word to small business owners yet it serves many useful purposes – six are outlined below.
The advantages of budgeting
- It’s easy for business owners to get caught up in the day-to-day grind and neglect the sort of planning needed for the business to prosper and achieve its goals. The budget preparation process will force you to think about where the business is heading and to commit to it in numbers.
- The formulation of a budget will enhance your understanding of what drives your business. It will focus you on profitable activities and make you think to the future. A proactive business will prepare a detailed annual budget and cash flow forecast, but will also set a longer term, high level forecast that demonstrates what the business is aiming to achieve financially. A document such as this is essential for succession planning and exit strategies.
- Budgeting provides an accountability framework if administered properly. This doesn’t simply mean expense management. A good budget will make everyone in the business, from Sales and Procurement to Human Resources, accountable for their commitment to the future.
- When properly converted to a three way forecast, a budget will forecast cash requirements over a longer period and assist in proactive cash flow management. It should be seen as a management tool, not a bank requirement.
- The use of forecasting can demonstrate the impact of cash flow management strategies, such as better debt collection or improving the stock ordering process, which in turn creates well aligned actions for the business.
- A budget commits the business owner to a plan. Too many businesses have good intentions but don’t achieve them because they are time poor and constantly fighting fires. A written financial commitment in the form of a budget, together with regular review of achievement to date, can sharpen the focus of the business owners and management team.
Where to start?
Budgeting doesn’t have to be a time consuming process. Simple budgets can be done in a matter of minutes. However, once business owners implement the process, inevitably they spend more time on the formulation as they understand the powerful difference it can make to their business.
The availability of cloud accounting software, with its advantages of real time data and accessibility, means that implementing effective budgeting and reporting, including interaction with management and advisors, is now easier than ever.
Whilst many business owners don’t have the time or expertise to prepare a budget, they should look to initiate the budgeting process in their business and embrace its benefits.
Your local Accru office can assist with all aspects of budgeting from formulation, forecasting and building accountability to management and KPI reporting to measure progress to your plan.