Whether used for personal, or professional reasons, a budget is a powerful tool for financial independence. This document can help business owners to plan their future income and expenses, reducing the risk that poor cash flow will spell the end of their new venture. By following the same basic principles you would use in a personal budget, you can figure out how much you’re likely to spend each month, and how much you need to earn to break even or make a profit.
Depending on the complexity of your company, your budget can be as simple or as complex as you want it to be. The key thing to remember is that all organisations need a budget to thrive – no matter how small they may be.
Here’s why every company can benefit from a budget.
1. It Helps You Figure Out What You Need
One of the first things that you’ll use your budget for as a business owner, is to figure out exactly what you need to launch your company. As you begin to plan your budget, you’ll need to set aside cash for all the crucial expenses that are required for your venture, from supply costs, to paying for employees and more. You’ll need to know how much it’s going to cost you to open the doors of your company, so you can apply for the appropriate loan or funding.
Remember to think about a wide range of expenses, including:
- Hardware and software
- Business inventory
- Furniture, fixtures and real estate
- Supplies and product manufacturing
- Employees and professional assistance
2. It Will Help you to Apply for Funds
The chances are that you’re going to need funding to help you get your company up and running. Very few entrepreneurs can launch a company out of their own pocket, after all. However, when you go to apply for a loan, or you present your idea to potential investors, they’re going to want to see evidence that you’ve thought through all the financial needs you might have.
A budget and business plan are two of the first things that any bank or investor will ask for when you approach them for capital. A reasonable budget, along with predictions of cash flow for the initial years of running your business, can help to increase credibility for your business with your lender. Even if you don’t have a high credit rating or a lot of history in your business, you might still be able to get a loan if you have the right budget.
3. It Sets You Up to Plan your Spending
In your personal life, a budget can help you to ensure that you’re spending money on the right things to achieve your long-term goals. In the same way, your business budget will help you to plan how much you can afford to spend each month, and how much you can afford to invest back into your business. You may even be able to get a better idea of the amount of money that you can draw out of your business bank account as a salary for yourself.
As you start, the chances are that you’ll need to plan your spending very carefully. However, as your company begins to grow, you’ll be able to see your cash flow growing, and you’ll have more opportunities to spend your money strategically on your future. The more detailed your budget is, the more it will guide you towards making the right decisions.
4. It Ensures You’re Not Taking Too Much of A Risk
Finally, creating a budget for your business helps you to make sure that you’re not putting too much time and effort into something that’s just not viable in the long-term. If you set up your budget looking at a “required profit” basis, you’ll be able to see exactly how much money you need to make each month to be able to afford to keep the lights on and the business running. Your required profit budget will also tell you how much you need to earn so you can afford to pay yourself a salary that you can use to pay the bills.
Even just by examining the marketplace and looking at your competitors, you should be able to see whether you can make enough money running your business to live comfortably. If your budget shows you that it’s not viable to run your company the way you were planning, then you’ll know that you need to change your strategy before you go ahead.