What is a budget? The technical definition is that it’s an estimate of how much money you’ll spend and generate over a specified period. For an SME, a budget is basically the amount of money you’ll use for certain things/projects. Ideally, every small business on the planet should have a budget. It’s not really up for debate; you just need one.
Of course, you’re probably wondering why on earth this is so important. Well, here are eight reasons that show you why your small business needs a budget:
The primary function of a budget is to help you plan ideas for your business. By running the calculations and coming up with a sum of money you can afford to spend on things, it gives you something to work with. You know figure out where your money needs to go, how much has to be spent on what, and so on. Who do you need to hire? Where will your business be based? All of these things can be planned when you’ve got a set budget that shows you how much money there is to spend.
A key issue in a lot of small businesses is overspending. You splash out far too much cash on different things to try and promote or build your business. In the end, you overdo it and end up with lots of overheads and not enough money coming in to cover them. What happens next? You turn to loans and end up in debt. This can all be avoided with a budget. Your budget shows you what you can afford to spend, so you don’t end up splashing too much cash and overdoing things. It helps keep you honest, limits your overheads, and makes it easier to make a profit.
People wrongly assume that a budget is all about how much money you spend. But, it’s also an estimation of the revenue you’ll make as well. As a result, this is so beneficial for your SME. By setting a budget, you’ve got estimations on how much money you will make during a period. In essence, you’ve got targets right there for you to hit. If your budget estimates you’ll make 'x' amount in the first quarter of the year, then you better make sure you hit it! You’ve got something to work towards, which also helps you measure the success of your business.
With a budget, you also get to see where the priorities are. Which parts of your business demand more money than others? For some companies, it may transpire than spending a lot of money on marketing will lead to the best return on investment. So, this becomes a priority, meaning you dedicate more resources to it. You can see which parts of your company need more attention than others, which helps you avoid instances where you spend lots of cash on one area and wonder why the results aren’t showing.
If you create a budget for a profit margin, this means you’re estimating how much money you need to make, compared to how much you spend, to generate a profit. Profits are the only way a business will ever see sustainable success. If you’re not consistently making more money than you spend, then you’ll never be able to grow your business. Budgeting lets you see what needs to be done to achieve profits and create a healthy profit margin. So, if you’re serious about taking your small business to big places, then you need a budget!
Budgeting gives you the benefit of seeing what might happen in worst-case scenarios. For example, what if you lose one of your biggest clients? By looking at your budget, you can see the money they generate for your company, remove it from the equation, and see where it leaves you. Then, you can make changes to accommodate this and ensure you plug this leak as best as you can. So, if the worst does happen, you can adapt to it far quicker than if you’ve got no budget.
Picture this; you’re looking to start a new project or take your business to the next level, and you want to hire someone to help with this. You feel like a new member of the team can help you move forward, but can you afford them? With a budget, you can easily look at your financial position and see if it’s possible to hire this person. As such, it helps you make an important decision with limited risks involved. This applies to pretty much any decision involving money; your budget points you in the right direction!
An SME needs investment if it wants to grow and bloom into something special. By budgeting, you’ve got such a simple way of attracting investors to your company. They can look at your budget, be impressed by the figures and the potential profit margin, then decide to invest. It’s not guaranteed that investors will be lining up outside your door, but having a budget is absolutely vital if you are looking for investment. Flip this around and imagine looking for investors without a budget. They’ll take one look at your business plan and turn you down because there’s no indication of your finances and how well things are going. Why would someone invest in a business that’s not clearly shown it can be profitable?!
So, taking all of this information on board, you should now see how beneficial a budget is. If your small business doesn’t already have one, then you need to create one right away. It’s the ultimate way of managing your finances and ensuring you don’t overspend on things that aren’t essential. Not only that, but it allows you to plan your company, make big decisions, and so on.
Many startups fail within a year of launching, and one of the reasons for this is a lack of planning and no clear budget. Don’t make the same mistake!