Top 5 Reasons Why You Need a Budget for Your Business
If you don’t have one already, I’m sure you’ve heard about the importance of having a budget for your business. But what do I mean by a ‘budget’? Well, here’s a great definition …
A budget is an estimate of income and expenditure for a set period of time.
Your budget is a plan for where the business is supposed to be heading — where we want it to go. As the saying goes:
“Failing to plan is planning to fail …”
At the end of the day a budget is simply a financial plan for the year. Without that plan, how are you supposed to know if the business is doing well and if you’re on track?
5 Reasons Why You Need a Budget
But why bother having a budget? Is it really worth the bother? The short answer is, yes, it is! Not prepared to take my word for it? OK, fair enough. Here are the top five reasons why you need a budget for your business:
It’s a Chance to Reduce Your Fixed Costs
This is a great opportunity for you to review your fixed costs in detail. Often, business owners spend such a long time focusing on their sales that they forget about their costs.
As a business owner, you should be predominantly focused on sales, but if you don’t keep an eye on your costs, they can creep up on you.
You should review each cost in your business with fresh eyes and ask yourself if it is necessary and if it adds to your ability to run the business effectively.
The majority of the time when doing this with clients, we’re able to find savings of between 5% and 10%.
It doesn’t sound like much but it adds up. On $500,000 worth of fixed costs, that’s a saving of $25,000 to $50,000, which goes straight on your profit and into your bank account.
It’s a Chance to Plan Your Sales
This is a chance to review your historical sales and start to plan what you think you can achieve this year.
You can review your current product or service range and see what’s selling well and what’s not. Think about introducing new products or service lines and discuss ideas with your sales and production team.
You can also review your marketing to see what’s working and what’s not working. Talk with some experts about what else you could possibly do to improve your marketing and grow your sales.
Essentially, this is a great way to identify opportunities to grow your sales over the next 12 months.
It Helps to Plan for the Team, Assets and Cash You’ll Need
By planning your costs and income for the year you’ll be able to also plan what team members you’ll need to help produce the results, and any assets or extra cash you might need to fulfil your plan.
You’ll be able to clearly see if you need new team members to help you achieve your budget, and you’ll also be able to see if you can afford new team members by increasing your costs and seeing what it does to your profit.
It will be clear if you need to invest in new assets like machinery to keep up with production, or a new van to put on the road, and again, you’ll be able to see if the business can afford it or not.
It will also show if there are periods in the year where you are losing money and need to cover your loss with extra cash, or if you need more cash to invest in extra team members or new assets.
Once you know this in advance, you can then do something about it there and then, instead of waiting until it’s too late.
It Helps Improve Motivation
What do you do to motivate a runner?
Give them a target to aim for.
It could be their personal best or the world record. The key thing here is the target.
Our brains are hardwired to achieve targets or goals. It could be as simple as a target to be at work by 8am or to earn $1,000,000 profit — either way, if we think it’s achievable, our brains will help us achieve it and we will be motivated.
Setting a budget is a target, and there’s nothing like a sales target to help increase motivation massively with you and your team.
I can’t tell you how many times I get calls from happy clients that they’ve just smashed their sales target for the month.
Interestingly, I don’t get so many calls telling me their costs are under budget, which is nearly as important. I guess that’s the bias we have towards increasing sales instead of managing costs.
Managing your costs is important too, but let’s face it, sales are more exciting, aren’t they? And to be honest with you, they should be.
Saving on costs will only increase your profit so far. If you really want to increase profits, then ultimately sales are where you need to focus.
The key part here, though, is to make sure the target you set is achievable. If it’s seen as not achievable, people won’t be motivated by it. In fact, it can have the opposite effect and demotivate people.
It Helps You Manage Your Business Better and Hold People Accountable
Whenever you’re looking at your financial results you really need something to compare them to. If you don’t, it’s hard to judge if the results are good or not.
With a budget in place you can clearly see if you’re on target or not. If you are not on target, then you can do something about it.
For example, I had a client call me this week as they could see that their sales for the month were falling below budget and they wanted to do something about it. We put an offer together and sent out an email to their database so that we could get a boost in sales to help us reach their target.
A budget also enables you to hold your team accountable.
Targets can be given to team members and used as part of their performance management and rewards system. This helps motivate them and helps to make sure the business achieves its budget.
I hope you found this useful and it’s helped to convince you to prepare a budget for your business. If you would like any help or would like to discuss this further, please give me a call on 1300 300 746.
Also, as a reader of this blog I’m happy to offer you a complimentary 90-minute introductory business coaching session.
This is a great opportunity to see what coaching is all about and to get advice about your business and recruitment process from an expert. During this session, we’ll:
- review where your business is now and where you want to take it,
- look at your current challenges and your opportunities, and
- advise you on what you need to do to take your business to the next level.
Either CLICK HERE or call 1300 300 746 to book your complimentary 90-minute introductory business coaching session.