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What Is a Business Budget?
A business budget outlines an organization’s goals by estimating and forecasting its revenue and expenses over a specified period. It’s an internal instrument that managers use to ensure that the company’s financial status meets its obligations and goals to continue operations. A budget is something that startups and small businesses must have as an essential part of their business plan. By practicing strict budget habits early on, budget planning becomes a regular task that you do on a quarterly and yearly basis. This microeconomic concept helps owners and managers understand the most fundamental aspects of their organization’s financial responsibilities to improve cash flow and satisfy corporate demands.
Are Budget Proposals Necessary?
The difference between a personal budget and a business budget is that the latter requires the approval of an authorized group before moving forward with a plan. Budget proposals provide an in-depth look into the anticipated costs of a project, enumerating what the proposers will need to complete a project. Note that the budget presented by the proposers merely estimate future expenditures, which increases the likelihood of the amount changing due to unpredictable circumstances. When this happens, submitting another proposal will be necessary to raise the budget and secure further funding.
However, company executives can be very particular about these requests. They need to be convincing enough to drive a favorable response from managers, posing a need for you to provide facts and figures that actively support your claims. The budget proposal should make it easy for readers to understand the scope of a project, as well as the factors that contribute to the outcome. Otherwise, it’s unlikely for the management to approve your request and supply you with what you need to pursue a plan.
Why Is Budgeting Important?
Never underestimate the importance of budgeting when running a business. It’s particularly crucial for small enterprises that are operating on a shoestring budget. Anyone who has had limited resources to support the growth and development of their business would know how overspending and financial mismanagement can easily jeopardize your opportunities in a competitive market. You never know when your business may encounter some financial difficulties down the line, so you should have enough resources to keep the company afloat for as long as possible.
Many business owners begin their journey with a wave of optimism, yet fail to establish a business budget that will lead them to an effective action plan. According to a 2019 survey by Statista, 65% of North American retail marketers admitted to an increase in their e-commerce marketing budgets. And given the growing popularity of e-commerce, it only makes sense to invest a portion of your budget on matters that will most likely benefit the business in the long run.
It’s clear that allocating the time and effort to set and manage budgets is not something you should take for granted. It’s a must for every business in any industry to review plans and monitor financial situations for the sake of the company’s overall performance. Doing so will enable you to fund current and future commitments, impose positive financial decisions, and control finances successfully.
Benefits of Budgeting
A recent paper by the United States Courts reveals 22,157 business bankruptcy filings in 2019, a significant decline from the 23,106 filings reported the year before. Surprisingly, companies like Forever 21, Payless, Sears, and Claires join the list of household names that filed for bankruptcy over the past three years.
Operating a business is just like managing a household. You have bills to meet and expenditures that you’re responsible for. Now, imagine if a business fails to meet one of its financial obligations due to poor budgeting practices. If the company falls short in its duty to compensate employees, people will likely leave the workforce for better opportunities. Not meeting insurance requirements can put the business at risk of being open to liability. Or worse, failure to pay rent after multiple eviction notices will force the company out of the property. Hence, knowing where you stand with your business budget should help project earnings and plan for unanticipated costs.
What Are the Consequences of Poor Budgeting in Business?
In the business world, no one is safe from financial burden.
For decades, General Motors (GM) was the largest American automobile manufacturer and one of the largest in the world, rising to fame with its popular brands such as Chevrolet and Cadillac. So it came to everyone’s surprise when the multinational company filed for Chapter 11 bankruptcy in 2009.
The cause? On top of high labor costs and mounting debt, thousands of businesses around the world, including GM, took a hard hit from the global recession that began in 2008. Although GM had the privilege to rise from the tragedy thanks to a government bailout, not many businesses at the time were as lucky.
So if high-profile companies—which the world never thought would fail—reach a financial crisis, there’s always the possibility of your company meeting the same fate if you don’t start thinking critically. Other possible effects of poor budgeting include the following:
Getting Started: How to Improve Your Business Budgeting Habits
Think of your company’s budget as a battle plan. A well-thought-out business budget goes a long way toward ensuring that your organization survives the toughest financial obstacles that come your way. But if it’s plagued with loopholes, miscalculations, and lack of factual evidence, your business may end up losing more than it thought it could.
But there’s more to budgeting than minimizing expenses and changing your spending habits, as it requires extensive research of various internal and external factors to determine what’s best for your company’s financial health. That said, let’s take a look at some of the easiest ways to approach business budget planning like a pro:
1. Stick to a Plan
Doing business without a plan in place is like entering a war zone with your hands tied and eyes closed. Many companies make the mistake of setting budgets that do not align with their corporate objectives, forcing them to spend their funds on matters that may not yield progressive outcomes. So instead of ignoring these plans, strategizing drives you to handle any threats and opportunities that may affect your financial standing. It also helps you deal with the impact that these expenditures may have on your business, as you work toward addressing concerns that were not a part of the original budget.
2. Keep It Flexible
There’s a chance your budget plan won’t work once you set it in stone. Unforeseen events and market fluctuations occur when you least expect them to, and you need to prepare for the effects they will leave on your business before it puts you at a counterproductive state. Adjusting to these circumstances might not be easy, but that doesn’t make it impossible. Being dynamic is also a trait you’ll need when planning for the next quarter or year. It gives you enough space in your budget for equipment or technology that will improve your company’s workflow for faster results. It even offers you the opportunity to invest in alternative strategies to replace old, inefficient ones. You have to make room for these changes if you wish to eliminate the need to let go of resources just to stay on target.
Thus, consider building flexibility into your budget plans to help generate accurate and sustainable outcomes for your business.
3. Openly Communicate with Departments
Effective budgeting demands the joint effort of company leaders, as the funds and expenditures of every department can potentially affect other aspects of the business. Speak with the managers and supervisors of each sector to gather data that may be useful to the budgeting and forecasting process. You can deliver and receive information through emails, letters, and memos, or you can call formal meetings with the team to answer questions and concerns. By keeping an open line of communication with all departments, you can reduce conflicts and remain committed to your company’s operational strategies.
4. Have the Entire Team Involved
Note that different budget plans are necessary for every sector of the organization, which you’ll find in reports, request letters, and other corporate documents. Because of this, you’ll want to keep everyone involved in your plans before you implement them. Doing so offers you a clearer understanding of their needs to make it possible for your team to set realistic budgets that will address their concerns. Your team, along with representatives from other departments and units, can work together on the different budget plans as you view each case from different perspectives.
5. Prepare for the Unexpected
While it’s ambitious for you to have a plan for everything, that doesn’t mean you can’t take the possibility of these obstacles into account. Taking the time to review market conditions and economic trends will help you learn more about the impacts that they will have on your company, which also gives you enough ideas to formulate a response. This approach will help you stay on top of these turning points if they do happen at the most inconvenient times. You also need to acknowledge that any changes, whether positive or negative, could have a severe impact on your operations, so proper budgeting and forecasting is essential to help streamline this transition.
6. Track Everything
Pay attention to details. You can never go wrong by tracking every trend, behavior, or market competition that may affect your company’s financial strength. Monitoring your budgetary progress is especially crucial for businesses that exist in a volatile environment. External changes can take a massive toll on your current and future budget, which is why you shouldn’t wait until the last minute to take action. It won’t hurt to look into the many possible scenarios that may occur at any given time. By carefully monitoring these details, you’ll have a clear idea of what to expect in the months leading up to the next budget planning session.
Ultimately, poor budgeting practices will leave you in a financial crisis. There are no shortcuts to prosperity; it’s a road with numerous potholes and unstable conditions. And even the slightest errors in cost projections or earnings can have disastrous effects on your operations. That is why examining records, and forecasting finances are vital in keeping your business afloat. And if done right, you can establish a budget that will influence all your financial decisions to help meet your long-term goals.