A budget is the prediction of the company’s business through an analysis of sales, expenses, investments, etc. Budgeting is the core foundation of a strong business, since without a clear budget it is difficult to navigate the (often) troubled waters of entrepreneurship.
Let us get into why a budget is a fundamental pillar of building out a business:
Help to set goals:
In, a startup, there will be unpredictable expenses, and calculating all costs in the present plus the future will be difficult. However, entrepreneurs should try their best to estimate costs, erring on the side of additional expenses during the budgeting exercise, so any emergencies will be taken care of by the buffer in the budget.
This will also help set realistic goals for revenues, marketing estimates, etc. which can lead to better business success.
Keeps stakeholders on the same page:
When you plan to expand your business, it is important to keep your stakeholders on the same page, and having a strong budget in place is an easy way to do that. Once all parties involved have agreed on the budget – e.g. the marketing team agrees that they will be able to deliver results within the budget, then achieving your business goals will be easier.
It is essential to communicate the company’s goals to your team, and a clear budget makes this possible. A simple statement like, “We need to make this x% increase in sales and we cannot spend more than y%, in order to ensure we have the funds to expand into this market by the end of the year,” delivers employees a quantifiable goal on which the team can focus and work towards.
A budget may even motivate your team to imagine outside the box for solutions to make up for sales shortfalls or expense overages, and to support the company hit its targets. The outcome is a united, involved, and committed team, which reflects on the company’s growth.
Gain control over financials:
Comparing the budgeted numbers – both revenues / sales and expenses, will give you a clear picture of where you are going right and where things need to be re-looked at and rectified. This will help keep your financials go on track and ensure a smooth runway for cash flows.
A properly structured budget will determine the amount of cash that will be needed for each department, and this data can be used by the entrepreneur to prepare the company’s fund requirements. This is true both in cases where the company has less cash and has to raise outside money, and in cases where there is excess cash that needs to be invested.
Evaluate financial performance:
Since budgeting allows you to create a spending plan for your money, following it ensures that you will have enough money for the aspects of business that are critical. This can also help in keeping you out of debt or help you work your way out of debt if you are currently in debt.