Three reasons why you should use a budget in your SME business

You may be thinking that budgets are only used in big companies.  Used well, the benefits of budgets can also be enjoyed by SME businesses.

Here are three reasons why you should use a budget in your business.

Test the financial impact of planned changes in your business

An annual review of your business plan at the start of a financial year may identify a number of changes you want to make in your business.  It may be another staff member, increasing your prices, adding or deleting a product line, or perhaps a new location.  Pricing these changes into a budget lets you see whether or not the change will increase the profitability or value of the business.

Test the financial impact of the planned changes before they are made so that adjustments can be made.

You also need to take into account increased costs.  That may be supplier costs, employee costs, or overhead costs such as rent and insurance.  Understand the impact on your business before it happens.

Be careful of making it an exercise of how much gets allocated to each activity or cost.  Use it an opportunity to decide if that activity or cost is still required.

Recognise any cashflow holes throughout the year

Seasonal variability, holiday periods, and tax obligations can create variations in your cashflow throughout the year.  Remember when creating your budget to take into account non-P&L transactions (eg loan payments, tax payments, owner drawings). By looking at your budget by month (or even by week/day) you can identify any periods where cashflow may be tight or negative.

This allows you to make changes to the business, or to arrange short term financing.

Measure your progress

How do you know if you have been successful unless you have something to measure against? 

A person training for a running race will measure themselves against both their previous times, and against the time they are trying to achieve to be competitive.  If they are not achieving their desired time, they will make adjustments to either their technique or training regime.

It is no different for businesses.

Measuring your progress against your budget allows you to recognise if you are reaching your goals or lagging behind.  If you are not achieving your goals, you can easily see in what part of the business requires adjustment.

Get help 

If numbers are not your thing and the thought of creating a budget feels overwhelming, get help.  Talk to your trusted business advisor who can guide you through the process.

Thanks for subscribing to my newsletter. I hope you have found it helpful.  If this is a topic you would like to learn more about, please get in touch.

Ann Gibbard - Oxygen8 Consulting

ann@oxygen8.co.nz

021 682 014