Why Is Budgeting Important For Your Small Business?

Woman Giving Presentation on Budget to her employees

Written by admin

August 30, 2021

A great business idea can only really be fully realized when you have a working budget plan. How is this so? This is because it is easy to be blown off course when talking about the financial aspects of your business, and you may find yourself spending more on something that is not necessary at the moment and losing budget for other important aspects of your business.

While the word “Budget” may easily be understood by everyone, in a businessman’s perspective, let’s dive into what a Business Budget is.

A budget for your business is a road map that is an indispensable part of your business plan. It essentially becomes a working document that outlines your start-up capital, your expected revenue, your actual revenue, expected expenses, and actual expenditures. A business owner should always consult their budget in order not to fall into debt by spending too much on something that is not part of the business budget.

business owners discussing about budgeting for their small business
Budgeting helps you plan for your business

Generally, a budget should be able to:

  • Control a business’s financial aspect
  • Guarantee that the business can fund its obligations
  • Ensure that the business meets its objectives
  • Help the business owners be able to fund future business endeavors

A budget for your business as defined above is, in a general sense, considered as one. But for business owners, it is important that they also know that there are several types of budgets that they can use, depending on their business timelines.

What are the types of budgets that a business can use?

1. MASTER BUDGET

This type of budget covers the whole business year and consists of the business’ projected income statement which shows the objectives of the business, oftentimes including the business’ proposed ways of achieving them.  Included here is the cash flow statement and balance sheet of the business for the business year.

Businesses may need different budgets depending on the nature of their business and specific requirements.

2. STATIC BUDGET

A business’ static budget forecasts the expenses and revenues of the business over a specific period of time, this budget remains unchanged no matter what changes the business might go through. This type of budget contains both inputs and outputs of value that are formulated prior to the start of the specific period that the static budget covers.

3. OPERATING BUDGET

An operating budget for a business is a well-forecasted financial budget of all of the expenses and revenue generated from the business’ daily operations during a specific period of time. An operating budget is divided into categories that is usually governed by the revenue of the product or service that the business offers.

4. CASH FLOW BUDGET

To simply put the last type of budget, a cash flow budget is a plan of how a business will generate cash and what it will be used for during the daily operations of the business. In this type of budget, if the money is not entering and leaving the business, it is not included in the budget.

Diminishing cash flow which can ultimately lead to closure of the business

While most people pride themselves in being able to budget their income for their everyday use, it may be tempting for a business owner to “wing it” when it comes to their budget. This is where everything starts to go wrong. Without a budget, any businessman can underestimate the expenses which can result in a diminishing cash flow which can ultimately lead to closure of the business itself.

This is why budgeting is important to small businesses. As it can help them:

  • Enumerate targets for the growth of the business
  • Improve the business’ focus based on financial facts
  • Be able to manage the cash flow effectively and efficiently
  • Allocate their financial resources appropriately
  • Monitor the business’ performance and growth in terms of finances
  • Be able to locate any financing problems the business may encounter

For the best results, a budget should always be reviewed on a regular basis. This is because there can be a lot of other data that can affect the business budget every once in a while, and it is always better to adjust accordingly.

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