Entrepreneurs are often told that a budget is an important tool to use in managing their business. However, many don’t know why it’s important. Maybe you set a budget at the beginning of the year and never hit any of the numbers. You wonder, “what’s the point?” Or, you set a budget and always come in over on revenue and under expenses, so you think, “I can do this without a budget”. Budgeting takes time and a lot of mental energy that is hard to drum up sometimes. So, why is it important? Here are three reasons why a budget is important for your business.
#1 – A budget (that is shared) gets everyone on the same page
If your sales team thinks their goal is to grow sales by 20%, but your budget shows a 30% growth in revenue, you can work together to determine what is reasonable and either increase the sales goals, decrease your budgeted revenue, update pricing, or meet somewhere in the middle. If you don’t set a budget and share it with your team, then everyone may be heading in different directions. You don’t have to share every piece of the budget with everyone, but your teams needs to be involved in the process.
Tip: Share key budget metrics with appropriate team members. The sales team should know and understand sales goals, marketing spend, and the effects of sales on the rest of the budget and how it affects other teams.
#2 – A budget helps you to see changes you need to make ahead of time
When you set your budget at the beginning of the year, you can see problems or other issues to address ahead of time. Your budget helps you to plan out the year, understanding when you will hire, if you will need to move to new office space, will including your expected sales growth and the corresponding staffing, equipment, materials, space, how you will handle cash flow shortages or windfalls.
Note: if you’ve updated your budget for sales growth and the corresponding increases in staffing, equipment, space, or other usage, and you see your net profit margin is not in line with your expectations, you can make adjustments. You may need to change your fee structure, increase pricing, or hire a different level of staff. Analyzing your business’ expected growth and change through your budget can help you to make the right decisions before it’s too late.
#3 – A budget gives you a measuring stick
When you use a budget to help manage your business, you can determine whether or not you are on track. You set a budget based on what you want to happen and what you think is going to happen. As you move through the year, you can analyze whether you are doing better, worse, or exactly as you thought you’d be doing. You can make adjustments to your operations to help you get to where you want to go. If you don’t have a budget, you won’t know that you didn’t get there!
Example: If you think you’re going to hit a sales milestone by June, and you get to June and you still haven’t hit it, you can review your operations to help determine why you didn’t make it. Did you set sales goals too high? Did your sales people not have enough leads to get to the milestone? Do you need to spend more on marketing/trade shows to get there? Do you have the right people on your sales team?
“If you aim at nothing, you will hit it every time.” – Zig Zigler
If you need help setting a budget for your business, download our FREE eBook: How to Set a Budget in 5 Simple Steps.