According to an article by Michael Flint entitled “Cash Flow: The Reason 82% of Business…
We all know it’s easy to get sidetracked and bogged down by operational day-to-day demands. However, maintaining an overly myopic view of your business can lead to blind spots that will ultimately cause you to lose sight of the big picture. Successful businesses invest in creating and managing a budget, constantly reviewing their business plan, and measuring metric specific business performance results.
Budget planning and forecasting not only helps with managing the financial aspect of your business, but also serves to enhance general business management. Converting this into a coherent, cohesive plan does not have to be overly involved and time consuming. The most important thing is that plans are made, adjusted as the business evolves, and are communicated company-wide.
Benefits of Business Budgeting/Planning
The key benefit of business budgeting/planning is that it provides a foundational framework for the strategic direction of your business along with financial targets that facilitate growth. This framework can then be used to measure performance and identify factors that may be undermining progress. Some of the main benefits to sound business planning and budgeting are as follows:
- Assistance with pricing of products/services
- Ability to monitor and control unnecessary expenditures
- Improved clarity and focus leading to better decision making
- Potential to attract investor capital
- Chance to open new lines of credit
- Enhanced monitoring of performance/meeting of financial objectives
- Ability to identify cash flow problems in their earliest stages
- Easier tax preparation
- Better planning for the future
Measuring Your Financial Performance
Creating a financial action plan by basing your budget on your business plan can serve several useful functions. Your company budget can serve as an indicator of costs/revenues associated with particular segments/activities, provide insightful information that serves to enhance management decisions throughout the year, and allow you to differentiate between actual and budgeted expenses/income.
Comparing actual figures to previous year(s) projections is an excellent way of benchmarking your business performance. You can also compare key economic indicators and figures to competitors within your market and to leading industry standards. Lastly, a firm understanding of business drivers such as sales, costs, and cash flow, can help you to identity problems early on, take corrective action, and boost overall performance.
Regular Budget Review
To utilize your budgets effectively, you will need to constantly monitor, revise, and review. This will be particular true during times of economic downturn or if you are planning on expanding into new areas. If something unexpected transpires that serves to throw your trajectory off track, it is easy to make modifications and adjustments if you already have a base budget in hand. At the end of the day, employing up-to-date budgets enables added flexibility, enhances accuracy, keeps tabs on cash flow, and allows you to hone in on what needs to be achieved during the next budgeting period.