Why you should prepare a budget?

Author: Russell Smith
February 21, 2014

I was once in a meeting with a prospective client and we were talking about his financials.

I then broached the subject of putting together a budget for him and started talking about the importance of budgeting annually.

He then said he had been in business for 23 years, he couldn’t predict the future and saw absolutely no point in budgeting since he knew he would get it wrong.

Now I have to admit, I wasn’t quite used to such a robust objection.  I took a moment, sipped my coffee and then launched into the reasons (with some passion) why a business should prepare a budget…..

1. You need to know how much cash you need to support the growth (or lack of) your business

2. If you don’t aim for a sales or profit figure, it is highly likely, you or your team don’t have a clear vision of where the business is going

3. You need to budget your costs so that someone in the business can keep them under control

4. It is likely in the year of a growing business that you will have to recruit.  Your budget should tell you the cost of this and also the cost of not recruiting quick enough.

5. Comparing your budget to your actual performance will give you a better idea of your profit margins.

6. Doing a sales budget gives you an idea of how realistic your sales growth is.  If a sales target has been produced by a salesperson – watch out, it will often be wildly optimistic.  Sense checking this will you more of a reality check.

and lastly…..

7. Yes, your budget will not be 100% accurate.   How can it be?  However, it will be more accurate and you will be in a better position to predict your future if you spend the time planning your finances.

 

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