According to the University of Technology, Sydney (UTS), it is estimated that one in three new small businesses in Australia fail in their first year of operation, two out of four by the end of the second year, and three out of four by the fifth year. According to a recent study by UTS, 32% of all business failures are due to financial mismanagement. Lack of cash is the single largest reason for business failure.
The importance of having a business budget cannot be underestimated.
What is a business budget?
A business budget is essentially a financial plan. It identifies current available capital and is used to estimate all sources of anticipated income and expenses for a business in an upcoming time period. The budget can be for a month, quarter, or year. It can also include longer term needs such as hiring more staff as the business expands, future maintenance, upgrades or replacement of equipment.
The budget should be flexible so it can be adjusted as the business and market environments change. It should also be monitored regularly to assess the actual financial situation with the forecasted figures and adjustments made as required.
A budget provides the business owner the financial information to run the business within its means and plan for the future. Planning ahead is particularly important for businesses which rely heavily on seasonal sales revenue when the bulk of the income may fall within only a few months of the year.
Benefits of budgeting
Most companies have several items which are paid regularly such as stock purchases, payroll, rent, utilities, insurance, advertising, and bank loans.
There are also other peripheral expenses not directly related to the day to day running of the business which may be overlooked in financial planning such as sundry supplies, parking, entertainment, or occasional contracting services like equipment repair, IT services, licensing, vehicle maintenance, etc. The key to success is to include estimates of all income and expenses. Make it as detailed as you can.
Taking the time to work on a detailed budget and revising it and adapting it as necessary can go a long way to helping your business thrive. Some of the main benefits are:
- Fund current commitments
A budget ensures you have enough cash available to fund current commitments. These include paying suppliers, staff, bills, insurance, loans, etc. Also, because a budget estimates revenue and expenditure, it helps you to stay focused by allowing you to restrict your spending on anything which is not part of the plan, thus improving cash flow.
- Increasing payments
A budget also makes it easier to make decisions about increasing payments in various facets of your business. For example, calculating if you can afford to increase salaries, pay bonuses, buy new equipment, hire more staff, etc. You can work out the added costs involved and reconcile them with estimated income, both short-term and long-term. You will have a clearer picture of whether these extra costs will be financially beneficial or detrimental to your business and you can make or alter plans accordingly.
- Prepare for the unexpected
No matter how well you plan, the unexpected can always happen. By spending the time to work out a detailed budget, you not only know which short- and long-term expenses are coming up, but you can also plan for any contingencies. Money can be set aside for any unexpected expenses or emergencies which may arise so cash flow in other areas of the business are not compromised.
You could, for example, set aside a percentage of profits in a separate account and allow the funds to build. If you end up with more than you think you’ll need some of it can be used to pay loans or other expenses. A win-win situation!
- Sales targets
The budget can include how much income you are expecting from sales in a certain time frame. This helps you to set sales goals. If those targets are not being met, you can make adjustments in your sales strategies, marketing, or in your estimates of expected income.
- Meet financial goals
Without a budget, your business is, effectively, flying blind. It is impossible to know the financial health of your company and you will have no idea if you have met or exceeded your goals. Without a budget, it may be the end of the financial year before you realise your company has not made a profit.
Having a detailed budget gives you the means to:
- understand and control the finances of your business
- make adjustments in business planning and strategies
- ensure that you have enough cash flow to fund your expenses
- make sure that you have enough money for emergencies and future projects
Business Queensland has a guide to work out a cash flow budget. If your business is medium to large you may require a separate budget for different departments. Whatever size your business is, your accountant can be of great assistance with budgeting as they know your business intimately.