Learn why Business Budget Planning is so Important

Planning, Control, and Performance Evaluation

A detailed and realistic budget is one of the most important tools for guiding your business and providing the information necessary to operate within your means, handle upcoming challenges, and ultimately turn a profit. Without a budget, it can be like shooting in the dark. A solid budget identifies currently available capital, estimates expenditures, and anticipates revenues. You should continually refer to your business' budget as a way of measuring performance against expectations. ​

Planning

A budget is a planning tool necessary for building a framework for your business and its finances. Combining past trends with realistic forecasts for the fiscal year, a budget provides a detailed view of assets, realistic revenue expectations, and how those balance against your anticipated expenses.

Budgets also help with setting goals and establishing priorities. A budget should detail where funding will come from to execute new strategies and how much revenue that can be generated by executing the strategies successfully. The line items that command the most funding or generate the most revenue typically are high-priority items, and that can serve as a good reminder of your overall strategy when making decisions.

An effective budget should break down revenue and anticipated expenses by month or by quarter, and depending on the size of your business, it should include separate budgets for each department. These departmental budgets also should be broken down by month or by quarter, and collectively they will come together to form your master budget.

Businesses that rely heavily on seasonal sales revenue serve as a good example of why a budget is so important. If the months of June, July, August, and December typically generate 75 percent of your business' revenue, your budget allows you to plan ahead so that you'll have the best strategy for distributing that revenue most effectively over the course of a full fiscal year.

Planning also should account for long-term needs. For example, if you anticipate a large expenditure one or two years down the road for computer upgrades, it's a good idea to start budgeting for that expense in advance.

Evaluation

In addition to being an important part of the planning process, budgets are necessary for evaluating the performance of your company over the course of the fiscal year. Part of budgeting responsibly is tracking actual revenue and expenses and comparing them to what was budgeted. This helps to assure that your business is sticking to its plans, but budgeting also offers an important means of identifying problems and opportunities.

For example, if sales in the first quarter are lower than what you budgeted, you'll know that you likely will have to find expenses to cut later in the fiscal year in order to stay profitable. A more positive example might be sales of a new product that exceed expectations. By tracking this trend and comparing it to what was budgeted, you'll know you have the additional revenue to perhaps revise the budget with plans to increase production or hire additional staff to handle the extra business.

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