10 Jan Why should I prepare an annual budget for my business?
Why should I prepare an annual budget for my business?
It’s essential to plan and tightly manage the financial performance of your business. Creating a solid annual budget will serve as a guide for the business owner for navigating through each month, quarter, and year to meet the business goals.
Creating an annual budget is one of a business’s most important financial aspects, but it often gets overlooked. It is important to define spending targets and sales goals to gauge the success of the business strategy. The planning process can often uncover opportunities or issues that may otherwise be missed. Starting the process of creating an annual budget can be daunting, especially if you need to become more familiar with accounting strategies and terminology. Here is a resource to get you started.
Benefits of an annual business budget
There are several benefits to creating an annual budget, including being better able to:
- sharpens your understanding of your business goals
- helps you understand the drivers of your business
- helps you allocate appropriate resources to projects
- allows you to monitor performance effectively throughout the year
- improves decision-making, allows you to react in facts versus feeling
- identifies opportunities for growth
- identifies problems before they occur and maintain fiscal control
- increases staff motivation
Elements to include in your annual budget
- Projected business expenses. The amount of money a business owner expects to spend in the coming fiscal year. It needs to be broken down into separate categories such as salaries, office expenses, travel, etc. When you project business expenses, it is important to input the actual numbers that you know, insurance, lease payments, etc…. It is also important to consider the “inflation factor” on expenses. We all know that everything costs more year over year. If inflation has caused a 10% increase in expenses, but you only added a 3% increase, you are already off 7%.
- Projected business income. The amount of money a business owner expects to earn in the coming fiscal year. They need to be broken down by sources. Consider this as an opportunity to review your current clients or customers, what will be the percentage of “repeat business”, where will the new sources come from. Is the growth you are projecting realistic? Did you consider any price increases?
- Reality is used as a gauge in every plan. Have you considered all the inputs that involve revenue growth? A plan is only as good as the assumptions that are used. Can you really grow your income by 50%, while only increasing your staff 10%? Do you know what your true gross profit margins are? Have you considered the personal commitment that the plan entails. A plan that requires you to work 75 hours a week is probably not realistic.
- Adjustments to reflect reality as the year goes on. Your budget will likely begin with estimates, and as the year progresses, those estimates need to be adjusted to keep track of the actuals. Most businesses treat the annual plan as a task, and it should be considered a living document. If you truly want to use the plan as a roadmap to success, the act of truing up assumptions, and changing goals is vital. This goes both ways…maybe you overestimated some expenses, maybe you underestimated revenue.
If all this information is new to you, then the main question isn’t “Why is annual budgeting important for a business?” but instead you should be asking, “How to create an annual budget for my business?”
It’s important to note that only some have the skills needed to create and manage an annual budget. The other way to look at it is that every team excels when you are operating most effectively. While you as the owner can probably “figure it out”, is that the best use of your time? What is the opportunity cost? If it takes you 20 hours to work on a budget, and a professional can do it in 5 hours, what could you have done with your time. As a small business owner, you wear many hats, unfortunately, the financial one fits the worst.
If you’re new to budgeting, or just need to better utilize your time, A Fractional CFO is happy to assist – contact us today!
About A Fractional CFO. Founded on the belief that all companies, not just large companies, can benefit from experienced financial professionals. A Fractional CFO leverages years of experience in various businesses, both large and small, from professional services to wholesale, retail, and manufacturing, giving us a unique skill set of experiences to help other businesses thrive, grow, and reach their full potential.
Tony Fremarek is the Founder of A Fractional CFO, LLC with offices in Plainfield, IL and Fort Myers, FL.