Why you need a business budget - especially relevant for SMEs

Starting or running a business is a thrilling prospect. But once the money starts rolling in, many business owners put financial budgeting on the back burner.

The fact is, structured planning can make all the difference to the growth of your business. Knowing where your business stands in a financial sense allows you to focus on growing profits, reduce operational costs and improve your margins.

Budgeting is a great way to keep businesses on track with finances, growth and profits.

Although formalising this process on paper doesn’t have to be time-consuming, only one in three business owners regularly spends time on strategic and business planning, according to research by Sydney financial services firm Hill Rogers.

And, while 69 per cent of SMEs have a trusted advisor, many have never discussed their business concerns with them, the research also revealed.

Budget benefits

Producing a financial report is an empowering process. It serves as a forward projection of the business’ expenditure and earnings, enabling you to make sound business decisions and continuous improvements, as well as obtaining finance during growth phases.

“Setting a budget is about becoming financially literate, which is an important skill. The better you understand your business finances, the higher chance you have at success in business,” says TAFE NSW management and small business teacher and Skills for Business program coordinator, Anthony Jones.

He reminds small business owners that those without a budget tend to struggle to reach growth milestones. Less understanding of cash flow makes it difficult to implement strategic growth plans, he adds.

“Businesses without a budget often feel as though they never have the money to purchase what they need to run their business,” says Jones. Hiring new staff, equipment purchases or marketing activity all costs money, after all.

Budgets help keep a plan of upcoming expenses, as well as ensure that profit isn't turning into loss.

“Budgeting is critical to the management planning process. Without one, you have no idea of upcoming expenses. A budget will ensure you don’t get stuck paying for items that can turn profit into loss.”

How to tackle it

A basic spreadsheet is a good start. Make sure you dip into your accounting program to ensure you’re using accurate figures. This is no time for guesswork.

Some other figures you’ll need for your budget include recurring income and expenses, predictions of future income, business overheads, staffing costs, and debt repayments.

Strong revenue figures are great, but if you’ve got more outgoings than revenue coming in, you could be in strife. Your business may be able to sustain higher outgoings for a short period if you’ve got cash available to survive the ups and downs, but longer-term dips spell trouble.

A spreadsheet is a great way to keep track of a budget.

Make sure your budget covers a specific timeframe. This process will also enable you to identify seasonal patterns, which is useful for price adjustment decisions.

“Having a well-planned business budget mapped out like this can mean the difference between success and failure. And this is true whether the business is a sole trader or a larger company structure,” says Jones.

Content from TAFE NSW