Business disasters are hard to predict. A client departure. A critical data loss due to computer failure. Losing key staff. All of these scenarios can affect your business.
A budget may not overcome issues, but it can mitigate them. A budget provides a focal point; a basis from which to make critical decisions to promote a fast recovery to achieve your strategic goals.
Budgets give you clarity. Clarity helps you make the best choices for your business.
In a nutshell, what is a budget?
On its face, it’s a simple thing. The best estimate of cash inflows into and outflows from your business and, from that, the profit or loss you expect your business to make.
We do understand the reality is often far more intimidating and often confusing.
There are several types of budgets. The reasons for preparing and way you prepare each type differs.
There are two main types: the cash flow budget and the profit and loss budget.
Cash flow budgets track cash flow. They give you a good idea of how much money your business will have available at any point in time.
Profit and loss budgets help you assess your business’s projected profit for a period of time, usually a year.
Why should I budget?
There are lots of reasons to budget.
Some key ones:
• Tracking the performance of your business.
Is your cash position where it should be?
• Modelling different business circumstances and understanding the various outcomes.
You can track actual income against expected income and monitor and manage various expense categories.
• Understanding profitability – both gross profit and net profit.
Gross profit indicates whether you are charging enough for the goods or services you provide. Net profit also takes into account the expenses incurred in running your business.
Do you have your road map in place?
Budgets are a road map – maybe Google Maps in 2019 – to see if your business numbers are on track. And enable you to use a variety of tools to interpret any variances and tell you what turn to make next.
No one can perfectly forecast the future and budgets aren’t infallible. They reflect the best estimates of business owners and their advisors. Budgets alone won’t get you to your destination. But without them, you’re driving in the dark with no lights.
Your business may not fail without a budget. But it will – categorically – make it harder to achieve your goals. Making the best decision is easier when you have all the information. And budgets are a key part of your business information.