Why your business needs a budget?

In preparing for a new year and in some cases in the early part of each new year, business owners make a list of important considerations for their businesses. One of the things that features in most of such lists is the need to get a working budget for the year. Such a move by business owners is due to the value they see in putting together a budget. In this article, I share with you three reasons why you need a budget for your business.

1. Efficient allocation of resources

Efficiency embodies the idea of optimal use of scarce resources. Thus, because resources are scarce, they must be utilized well. The resources of a business includes financial (cash in hand and at bank), human (employees) and capital (motor vehicle, office furniture, computer and accessories, among others). Having a budget informs you of which departments, units or areas of your business which needs what resource and in what quantity. The situation of over and under allocation of resources to units within the business is prevented.

2. Control of expenditure or spending

One of the main objectives of every business is to make profit. Profit making is a function of one of two things: improved revenue generation or reduced spending. It is sad to note that most business, due to the absence of a budget, spend without tracking their spending. The result is that in spite of the good revenue-generating efforts, they record losses due to high spending. A business is less likely to face this situation when it has a budget.

3. Measurement of financial performance

A business can measure its financial performance in diverse ways, for example, by comparing current with past performance or with the performance of a competitor. Another way is through the use of budget. Budgets, among other things, give insight into how a business wishes to perform in respect of revenue and expenditure for a forthcoming period. Consequently, a business can compare its actual performance for a period with the budget it prepared for that period. Variances (differences) can then be analyzed and corrective actions taken where necessary. A comprehensive notes on how to do can be found on in this article: How To Use Budgets To Manage Your Business Performance.

The foregoing are among the many benefits that a budget can give you as a business owner. It is noteworthy that it is one thing to set a budget and another thing implementing a budget. Jim Rohn has said it succinctly that, “The bridge between goals and accomplishments is discipline”.

Remember to communicate your budget with all persons affected by it and show the needed discipline in executing it. This way, you will see the difference a budget can bring into your business.