- May 14, 2019
- Posted by: saenicsa
- Category: Business plans, Consulting, Finance & accounting
To start, what is a budget? A budget is simply an estimate of revenues, expenses and capital reserves for a set period of time. It is an essential part of good financial practices and a helpful tool for business owners. At the end of this article we have a download link for a budget template that we would like to invite you to download at no cost to you, but in the meantime let us discuss just how important a budget really is.
Importance in fulfilling vendor obligations
When preparing a budget, it is important to make sure that all expenses are taken into consideration. This means that everything from employees, rent, inventory costs and so on need to be listed and added up. To forget or simply not include an expense for however small it may have serious consequences later on, therefore at this stage it is important to take note of everything.
What types of consequences can happen? Well, for instance if you don’t budget for an expense, then it becomes much more likely to not be able to pay a vendor, or worse having to decide between who gets paid and who doesn’t, which for any business person is not only embarrassing, but it could mean that a vendor later on decides to not continue working with you. To lose an important vendor could mean not only having to take the time to now source the same product from someone else, but any special markdowns or credit terms will also be lost.
If you take all the necessary steps in making sure that all vendor obligations are correctly listed and added up, you can rest assured that not only will you not forget about paying an expense, but you’ll also have the money to pay everyone and avoid uncomfortable situations.
Essential for improving profits
How profitable is your business? Within your budget, what areas can be reduced? What are your profit margin goals and what modifications need to be made to both income and expenses so as to fulfill them? These questions are crucial to make when working on your budget, because when you make them and really scrutinize each line of your budget, the opportunity to leverage your profits becomes a reality.
Why is this? A lot of times business owners don’t have the time to consider their expenditures and revenues as much as they should. Therefore, over time expenses and costs can tend to inflate. The reasons for this vary, but everything from the increasing cost of doing business to internal inefficiencies can give rise to lower profit margins.
Therefore, if it is important to you to maintain profits or increase profits, then take the time to reflect and prepare your budget well, it is the best opportunity to do so.
Vital in keeping a business open
Assume that you have prepared a detailed and accurate budget and you’ve put it into practice within your business or organization, but even though it was good to start with after a while you begin to notice that your business isn’t being able to pay vendors and you’re barely able to make due on rent and salary costs. What happened? Well even though you started everything well, obviously you didn’t give adequate continuity to updating your budget.
A budget is vital to keeping a business open and functional. Any business person will quickly find out that even though you have prepared an excellent budget, in reality it is almost impossible to get a budget to predict the future. Therefore, it is important to update and change the budget as necessary. In fact, it is even better to manage your budget vs. actual reports so that you can see just how much the variation between projection and reality was.
We hope that this article has been helpful in explaining what a budget is and the importance of managing it correctly. If you would like assistance with creating a personalized budget for your business or any accounting or tax help, feel free to CONTACT us.