Does Your Business Need a Budget?

Overview

This article answers the question, “Why should I prepare an annual budget for my business?”  

A good portion of my career was working with large public companies where an annual budget was the norm. Privately owned small or mid-sized businesses are not as consistent in their financial planning and analysis (FP&A) practices. Budgets are essential for private companies of all sizes, and this article will help you understand why and where to focus your energy when preparing a budget. 

Look to the Future

As the leader of the business, knowing where you are going is imperative. Most company owners can articulate the company goals. The day-to-day running of the business, however, can turn your focus to the present; before you know it, you’re mired in the details and not going in the direction you hoped. An annual budget process helps you set a company discipline to think about the future. An annual budget allows your company know it is time to take a step back and think about company goals and how to reach them.

Resource and Financing Needs

How many people do you need to hire to manage the new clients you are anticipating?  Do you need a line of credit to cover working capital? Budgeting helps you line up resources before you need them. Early planning increases your return on critical investments. A budget helps you plan ahead. 

Knowing you need that line of credit or equipment loan well before you need it gives you time to compare lenders and choose your best option. It also gives your lender an understanding of what you need so they can structure your financing around your needs rather than offer a vanilla solution.  

Understanding human resource needs gives you time to recruit the best talent and build the team needed to reach your goals. 

Decisions, Decisions, Decisions

Your greatest value as an owner is your vision and the decisions you make to reach your goals. You are deploying company capital and resources to achieve a return on investment. The decisions you make determine the company’s success.

The most important reason to prepare a budget is to hone your decision-making skills. Like an archer aiming at a target, you need to know where your last shot hit to adjust your next one. 

Think of your budget as “what key decisions will I make next year to help us reach our goals?”. If you start with this in mind, you will develop a budget that is a tool to help you make better decisions.

Manage Costs

In my opinion, this is the least important reason to prepare a budget. I say this because I often hear this as the main reason to prepare a budget. Preparing a budget solely to manage costs makes the budgeting process seem like a restraint. 

Reviewing your budget vs. actuals each month will help you identify unexpected expenditures. Managing your expenses is valuable but not the main reason you should prepare a budget.

Should Your Company Prepare a Budget?

Should you prepare a budget? What if your costs are too hard to predict? Your costs don’t change much? You are growing a lot next year and you’re not sure how to estimate the impact? Your expenses are under control? You keep a budget in your head? 

The answer is yes; you should prepare a budget. Early-stage companies, growing companies, and companies preparing to exit benefit from having a structured budget process in place. Preparing an annual budget will increase your return on investments, improve your decisions, and help you meet your goals. 

About

Highpoint CFO is a CFO consulting firm based in Tampa, Florida that serves clients throughout the US. 

Scott Young is the President and Principal Consultant at Highpoint CFO. He is a CPA, Certified Merger & Acquisition Advisor (CM&AA) and Certified Value Growth Advisor (CVGA) with over 25 years of experience in finance and accounting at industry-leading companies.

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