Why does a business need a budget?

As businesses grow and get more complex, they often experience a financial evolution.  While we believe that even a startup should have a budget, the fact of the matter is that many do not.  Establishing a budget is typically the first step a company will take when they decide to get serious about their financials.  A budget allows a business to set a framework within which it operates as well as a way to measure it performance and adapt its operations.

Why do you need a budget?  You need to understand the cash needs of your business, to make sure that your costs are in line with your revenues, and to make sure that you have the working capital necessary to operate the business as it grows.  In addition, a budget  gives you a baseline against which to measure your performance as well as to get a read on your forecasting skills.

Most financial software and management tools will provide a relatively easy way with which to establish a budget.  For example, Quickbooks and Xero, two of the leading small business accounting tools, allow a means to do so within their software.   In Quickbooks you can use previous year data as the starting point for your budget as well as run reports comparing actual data against your budget to measure performance

Many entrepreneur's excuse for not setting up a budget is that they don't know where to start or can't make an accurate one.  While you want numbers to be realistic and accurate as possible, those thoughts shouldn't cause you to not create one.  In my mind, a budget is a living document that you are constantly revising.  Over time, it will get more accurate.  Short-term budgets will be more accurate and easier to generate than long-term.  This is especially true in organizations that are experiencing substantial growth.

Budgeting is an important first step in upping the performance of your business.  Let us know if you have any questions on the specifics of the process or how an accountant can help you start in the right direction.