Why Is Having A Budget Important For A Business?

Why is having a budget important for a business? A budget allows you to track how well your business is doing and let's you see where changes need to be made. First of all, for a startup business, a budget...

First of all, for a startup business, a budget is the place where you tie all of the rest of your planning down to numbers and also timing. For example, if you need to buy a piece of equipment you need to know when you are going to order it so that you can have it on time to open the business and you also have to plan for the money necessary to buy that equipment. So the budget becomes the place where you can tie all those things together.

Beyond that the budget is the roadmap where you believe you want to go so it helps you set goals in terms of what revenue you want to achieve. And it is also a way to track those goals. You look back at that budget in three months and say am I in fact yielding the revenue goals I set and am I spending what I thought I would spend or am I spending more or less. So it provides a great tracking tool and beyond that it puts a discipline on yourself to do all the homework necessary to get into business because you have this opportunity to look forward and ask: What do I need to buy? What do I need to have in place?

So a budget gets you prepared and helps you see whether or not you are going to make any money. A budget also helps you determine how much money you need to raise. Most people don't have enough money to start by themselves without having to borrow from someone like an investor, so knowing exactly what you need is critical. Finally it's a way to measure your success against your expectations.

For an established business most of these things would remain the same. A budget helps you plan ahead for the next year. For example, you may want to bring in a new product. Let's say you're developing an electronic device. A budget helps you see where you have to spend R & D funds, the tooling, and the manufacturing. All those things take time and of course money. So the budget becomes the discipline that forces you to think about the timetable as to when you need that money. How much you are going to need and what you expect to make as a profit for the investment of that money and effort.

The budget is an important planning tool because if other parts of your plan like your marketing expenditures or your salary levels and so on don't tie together you've got a problem coming out of the gate. So you need to have everything planned and then meet those plans in order to be a success.

A budget allows you to track how well your business is doing and let's you see where changes need to be made. If you a new business doesn't break even within two years I would say you need to think about either changing the business or coming up with some other strategy that's going to allow you to start to make money. Most businesses do not make money in the first year or certainly not the first six months, but this would vary a whole lot depending on what kind of industry you are in and what kind of business you are in. For example, if you are starting a small hot dog stand on a street corner not a whole lot of up fund capital is necessary and planning for that is less complex and tedious. But let's say you are starting up a retail establishment in a mall. You have to think about renting the space and having the money for inventory and know that retail sales are highest during certain parts of the year.

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