Have you ever heard the expression, failing to plan is planning to fail? It is especially true when it comes to financial business planning. This time of year, business owners are starting to turn their thoughts to goals for the new year, and having a solid business budget should be part of your end-of-year wrap-up.
An annual business budget helps business owners determine what they have available for operations, payroll, cash flow, and any other activity that costs money. A budget also helps manage debt and serves as a guide for forecasting. Operating without a business budget can lead to spending money that is unavailable, running up debt, not having a proper emergency fund on hand, and ultimately not being able to pay yourself what you deserve.
Your budget is the numerical representation of your company’s financial goals for the period (generally the fiscal or calendar year). It’s not just the goals but the plan to get there. Maybe your goal is to increase revenue or pay off your accumulated debt. A budget shows what you want to achieve and how you intend to accomplish those goals.
Today we want to share why budgeting for the upcoming year is important and how it can lead you to the most successful year of your business life.
Why is Business Budgeting Important?
Budgeting involves planning, number crunching, and attention to detail within your business finances. It is not everyone’s favorite activity, but it is well worth the effort. Here are some great reasons to make a 2023 plan for your business through a budget.
The main goal of a budget is to ensure that the business has enough resources to function and meet goals. There will be times in your business when specific projects or activities need more financial resources. By planning for these items in advance, you can determine which activities require more resources. You can also select areas where you can make cuts.
Set and Track Internal Goals
Budgeting for an upcoming period isn’t just about determining the amount you can spend; it’s also about deciding how much revenue is needed to reach the goals you have for your business. Budgeting can be used to set company-wide and individual team financial goals. Your financial plans should be realistic and attainable enough that you count on them to inform the rest of your budget decisions.
Having a budget can also help to update employees on progress and revisit the next period’s goals. For example, if your company had the plan to sign ten new clients in a quarter, but you only signed five, what could you have done differently? Does the goal require a redistribution of funds? Are their resources that could have propelled progress? Tracking progress within the budget allows you to align your team with your growth plan for the coming year.
Determine Project Priority
A great byproduct of creating an annual budget is that it forces you to prioritize projects and business decisions. Making decisions based on the resources you have on hand forces you to consider ROI (return on investment) on expenditures and how it aligns with your company’s long-term goals. When you consider the resources available to investment, you are more likely to be discerning about how you spend money in the business.
Creates a Roadmap
A budget is a financial roadmap for the upcoming year. If all goes to plan, the budget should show how much you anticipate earning and spending in the forthcoming year. Since the world is unpredictable, circumstances outside your control might impact revenue or force you to change your priorities. A budget gives you a plan but also allows you to be agile if circumstances change suddenly.
Avoid Wasteful Spending
Without a budget, you can easily waste money without even realizing it is happening. A budget is a roadmap for spending throughout the year. Without the map, you can be wasting money without even realizing it. Wasted money takes away from profit and can create cash flow problems throughout the year. Businesses waste money in some prevalent areas; you can read more about them here.
Create your 2023 Business Budget
Three numbers are especially important to consider if you are ready to start your 2023 business budget.
The definition of revenue is the total amount of money brought in through business operations, measured over a set amount of time. It is the number before subtracting any expenses. Revenue is calculated by adding up all of a company’s earnings from sales over a specific period of time.
Business expenses are the costs accrued during the ordinary course of business. There are a variety of types of expenses that occur regularly in a business. You can read all about the kinds of expenses here.
Cash flow is the cash balance that moves into and out of business at a specific time. Cash is constantly moving through your company. When you hire a contractor and pay them, money flows out of your business. When you collect payments from clients, cash flows into the business.
Cash flow can be positive or negative. Positive cash flow means a company has more money moving in than moving out. Negative cash flow indicates a company has more money moving out of it than into it.
Types of Cash Flow
- Operating cash flow is the net cash from a company’s regular business operations.
- Investing cash flow is the net cash generated from a company’s investment-related activities.
- Financing cash flow is how money moves between a company and its investors, owners, or creditors.
Here are some past articles that can also be helpful for business owners when planning an annual budget.
Tasks to Keep Your Business Financially Healthy
How to Use Debt as a Tool in Your Business
We strongly recommend you take some time to budget for 2023. If you need any help, get in touch! We would love to help you start 2023 strong and ready for success!
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