Many factors influence how successful a small home business will be. Unfortunately, your expertise and dedication alone are not enough to guarantee your business will thrive. You also need to address certain practical factors.
That’s why creating a budget is so important. While this isn’t necessarily a task many business owners look forward to, it can be easier than you think. There are now many budgeting tools that help you automate the process, and the benefits of taking advantage of these are significant.
A proper budget is essential for the success of any small business. The following are only a few of the most important reasons why:
Understanding Your Own Growth
From a financial perspective, the basic goal of any business owner is to make more money than they spend. You can’t understand whether you’re hitting that goal if you don’t understand your expenses, set limits, and track cash flow. A budget gives you parameters for assessing your overall financial situation. Understanding your profitability is impossible without a budget.
A budget will also help you monitor your growth with greater accuracy. While your basic goal may simply be “earn more than I spend” when you start out, you may have more ambitious goals as you grow, like earning a certain amount each year. Maintaining a budget will let you know if you’re on track to reaching your goals. If you find you’re not making progress to the degree you had hoped, you’ll also have the opportunity to address key problems you might have overlooked without a budget.
It’s uncommon for any business owner to avoid wasting money entirely. There’s certainly a good chance you are spending more on something than necessary, which can impede your progress toward profitability. When you routinely exceed your budget limits for a particular category of expense, that’s a red flag that may indicate waste. The limits a budget imposes can also motivate you to find lower-cost replacements for expenses as well.
Of course, if you don’t maintain a budget, you may not even realize that you’re wasting money—and you certainly won’t know which specific expenses are higher than they should be. This is yet another issue a budget helps to solve.
Understanding When You Need to Save
Every business is different. That said, in many industries, there tend to be periods throughout the year when work is slow. You shouldn’t assume you’ll make a consistent amount of money every quarter, or even every month.
Keeping a budget helps you identify when those slow periods tend to occur. This gives you the chance to save up ahead of time, so you have the funds necessary to stay in business until the busy season starts again.
You may eventually want to seek funding from outside sources as you grow your business. You’ll need to prove to these outside sources that you have a proper strategy in place to grow the business with the funds they provide.
They’ll be less inclined to invest, however, if you don’t have a budget to show them. Your budget demonstrates that you have a plan for your business to achieve profitability—it shows that you’re serious about your venture, not just “winging it.” Potential investors need the opportunity to evaluate your current financial circumstances before they agree to provide funding. With a budget, you can boost their confidence in the overall safety of investing in your business.
Helping You Afford Major Investments
If you don’t have a monthly or quarterly budget, you may not be able to save up for equipment purchases, new initiatives, or other major expenses that represent long-term investments rather than operating costs. When you don’t keep track of your cash flow, it can be difficult to think long-term—you’ll likely be more occupied with just getting by each month. This is a mistake, because almost every business will have to invest in new equipment, facilities, or a new venture at some point, no matter the industry. Budget limits help you reign in spending and allow you to allocate something for these major investments that your business will need to grow.
Paying Yourself Fairly
One of the most difficult tasks for any small business owner is determining how much of their earnings they should keep, and how much they should funnel back into the business.
Of course, there is a danger in paying yourself too much. On the other hand, it’s absolutely possible you’re not paying yourself nearly as much as you ought to be—many small business owners do not pay themselves at all, thinking they should keep the money they make in their business, rather than draw a salary.
Regardless, you can’t accurately determine how much you should pay yourself unless you keep a budget. If you ever decide to hire new employees or enlist the help of freelancers, a budget is also essential for keeping track of labor costs.
Once again, budgeting for a small business does not need to be as difficult as you may assume. Research the many tools available for this purpose, and implement those that seem ideal for your needs. You’ll be happy you did in the long run.