Why Your Small Business Should Create a Budget




  • — November 14, 2018

    Does your small business have a budget?

    For the majority of small businesses, the answer is – no. This is according to a new survey of 302 small business owners. The survey found that 61% of small businesses did not have an official, formally documented budget for 2018.

    Why Your Small Business Should Create a Budget

    Small businesses might have a hard time maximizing their financial success when they skip a budget.

    This article discusses why small businesses might skip a budget, what they risk by doing so, and offers some tips for creating a budget.

    Small Businesses May See Budgets as Constraining

    The over half of small business owners that skipped an official 2018 budget may make that choice intentionally

    Rhett Molitor, co-founder of Basis 365 Accounting, explained that many people go out and create small businesses because it offers them freedom they couldn’t find in an already established workplace. For these owners, a budget might feel constraining.

    “You don’t really want to hold yourself accountable to anything because that’s what you’re trying to escape,” Molitor said.

    Furthermore, creating a budget may seem overwhelming for small business owners that are already plagued with daily obstacles.

    Lastly, businesses may skip a budget because they are operating in an uncertain environment, where predictions of the future seem worthless because things change so rapidly.

    Yet, budgets don’t have to be constraining. In many ways, they allow a business to better plan for the future – so the businesses have more opportunities to grow.

    There are a number tools that can also assist businesses that seem overwhelmed by the budget creation process. Software solutions such as QuickBooks to Centage can simplify budgeting.

    Finally, budgets can provide guidance through the murky waters of operating a small business, even when there is a higher level of uncertainty.

    Lack of a Budget Can Lead to Issues

    Without a budget, businesses risk a number of issues, such as:

    • Limited long-term planning
    • More unforeseen expenses
    • Inability to identify problem areas before it’s too late

    There are many examples of businesses whose lack of budgeting led to issues.

    Nathalie Noisette, the founder of Credit Conversion, explained how her business struggled when it first started, running without a budget: “It was very difficult to determine what our company would need financially on a month to month basis.”

    At one point, the money ran out with little warning.

    “The final straw came when we sent out all of the processing for the week and realized the accounts were tapped out,” Noisette said. “Zero dollars to work with… That is when we doubled down on our financial efforts. We hired an accountant to account for all of our money.”

    A lack of budget can even hurt lower-level employees, who don’t have a say over whether or not there is a budget.

    “We don’t currently have a marketing budget, and I get anxious about everything I need to pay for,” explained Lauren, who works as a digital marketer at a lab testing company.

    “I’m afraid that I may spend too much money, and then retroactively be punished by a very stern talking to from the CEO,” Lauren said. “Although I get all things approved beforehand, since we don’t have a cumulative budget, it’s hard to gauge where money should be spent.”

    Overall, Noisette and Lauren exemplify how a budget can help all the employees of a small business.

    Tips for Maximizing Your Budget

    You’ve taken the plunge and decided to create a budget for your small business. Great! How can you ensure you are making the most of the budget, though?

    • Account for Unreliability

    Many small businesses know the pain – a customer owes you, but can’t get the check to you quite yet.

    However, when customers don’t pay on time, the business itself may then also struggle to pay its bills.

    When creating your budget, allow wiggle room for unreliable customers. It’s better to be safe than sorry.

    • Consider the Seasons

    Most small businesses will face some changes in cash flow due to the seasons. Whether you’re a retailer planning for the holidays, or a B2B provider accounting for companies’ differing fiscal years, you should ensure you’re planning for these common financial swings.

    Seasonal changes may not even be related to customers – will you be needing to pay more for the air conditioner in your store during the peak of summer?

    For example, you can ask yourself:

    • Do I need to hire temporary help during parts of the year?
    • Am I giving out holiday bonuses?
    • Will I need to host any seasonal events?

    Seasonal changes in cash flow can challenge any small business. However, a budget allows the business to plan how they can use their busy periods to help them through their slow periods.

    • Regularly Review Your Budget

    You shouldn’t spend the time creating a budget only to set it aside until the end of the year. Rather, use it as a tool quarterly, monthly, or even weekly.

    “Don’t wait until the end of the quarter or the end of the year,” said Matt Ross, COO of RIZKNOWS and The Slumber Yard. “By looking at your actual results versus your budget every 30 days, you can see how and why your business is missing the mark and make timely adjustments.”

    A budget offers guidance – reviewing it frequently allows your business to make the most of your calculations.

    Overall, small businesses shouldn’t be intimated to create a budget, or scoff at the necessity of it. Understand the real issues that may occur if you skip a budget, and take advantage of the plethora of resources available online to help guide your first budgeting process.

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    Author: Riley Panko

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