7 Benefits of Having a Budget

They tell me I need a budget, but why?

Budget is this word that gets thrown around in business. Have a plan. But I know what is going on in MY business. Why do I need to put it down on paper. 

Here are a few reasons. 

1. Expense control. When your business was small, you knew what was going on. You watched every expense like a hawk. But now you have a team. An A/R department paying bills you've never seen. Marketing running amok on some vague mandate. Subscriptions up the wazoo. If you don't have a plan, you lack the ability to know when things have gone too far. Every expense has a justification, but marketing or sales eating up 150% of your revenue is probably something you recognize as wrong. But how about 95%? How about 85%?

2. Resource planning. You only have a certain number of resources. Most businesses are constrained by money. Others by time. Yet others by the speed with which they process income orders. Whatever your bottleneck is, having a budget will help you plan, materials, management bandwidth, space, capital, and more. 

3. Budget to actuals. If revenue is down, how long does it take you to notice? How about if revenue is at expectations, but the cost of goods is higher than it should be? Having a budget can help you measure everything from revenue (even revenue per salesperson, channel, or product line, etc), to A/R, to magazine subscription overages. And everything in between. 

4. Cash flow. While the budget is your plan for sales and profits, cash flow is a very important derivative. More sales can result in more cash. Or less cash. It all depends on your business. But threading the needle and planning for the both the gross revenue and its timing will help you anticipate when you should be getting cash in the door. Same for the cost of goods. Are you buying materials and paying when it ships, having a clear handle on when your revenue will materialize will tell you both when you need the good and when you'll have to pay for them. 

5. Shareholder and stakeholder confidence. Imagine your kid asked you form money and had no idea why they needed it or when they'd be returning it to you. How would you feel? How about if your boss ran everything by the seat of his/her pants. Spending on the next shiny thing. Hiring people with no view toward profitability (other than the vague notion that this person was "the type")? Having a plan you intend to stick to (and updating it when necessary - due to positive or negative changes to the paying field) will generate confidence in your investors, bank, and employees. 

6. Accountability. It is not just you. If the marketing department has a budget of $1 million, they need to achieve their goals under that budget. There could be changes due to unusual opportunities, but other than that, marketing is held to their predetermined goals. If they go over, they answer for that. Same for facilities. Same for development. If they said they'd get it done, they ought to do just that. Having a plan makes it clear that we are all on the same team playing our unique role and supporting the plan we've all accepted. 

7. Tax planning. If we have a budget and keep it updated, we don't have surprises at the end of the year. If we can anticipate how much money the company will make, we can plan for tax mitigation, capital allocation, and much more. 

Want to learn more about putting a budget together, reach out. 

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Imperial Advisory CFOs is a team of CFOs with 30+ years of experience. We help business owners and CFOs get back to what they do best.