Why it’s a good idea to have a business budget
Setting up your business and getting started is definitely an exciting time for any Michigan small business owner. When you have a great business idea, or are passionate about something, it’s easy to get carried away with big ideas and forget about what you need to do to make them happen.
But, it’s important to take your time and make a complete budget first. The survival of your business depends on it. Read on for some reasons why you should include a business budget as part of your regular business planning.
Most Michigan business owners intend to make money–and need to if they plan on staying in business for very long. The point is to make a profit, or at least to make enough money to stay afloat.
When you identify your projected income and expenses, you’ll be able to see if your idea has what it takes to be profitable. If you can’t find a way to make your earnings larger than your expenses, you’ll need to go back to the drawing board.
Starting out with a budget is not only important, it’s necessary to get financing. When you go to the bank to ask for a loan, they will ask to see your business plan. A key piece of this plan is your budget.
Showing your expected costs helps the bank weigh how much money they’re willing to loan you. If the numbers don’t add up, you’re going to have a hard time securing financing. Your budget also gives them an idea of how realistic you are with your projections and your spending, which helps them decide whether you’re a safe bet to pay back the loans.
It seems straightforward enough to sit down and write out everything that your business will spend money on. However, the actual spending amount is rarely the same as your best guess.
Inevitably, something comes up that you did not put down. And while that something will be important to keep your business going, it’s going to disrupt your budget. Making a budget and checking it will help you to become familiar with your business expenses. This means you’ll get better at creating a budget as time goes on.
Expectations vs Reality
Analyzing your real expenses is as important as creating a budget in the first place. Comparing how much you actually spend each month with what you thought you would allows you to see where to make adjustments.
If you’re overspending, you can identify what you can cut out for the benefit of the business. If you’re underspending, you can decide where to invest that extra money. Either way, it contributes to the financial health of your business.
The only way to set goals, priorities, and spending limits is by creating a business budget. You can save for large future expenses monthly, such as income tax, so that it’s easier to make the payment when the time comes. Most bookkeepers in Michigan will advise you to plan your expenses for at least a year for this reason.
Planning your expenses for 12 months or more is known as forecasting. A budget forecast allows you to develop a sense of cash flow for your business. The advantage to planning this far in advance is that it allows you to prepare for leaner months by adjusting what you spend all year.
Most importantly, a business budget allows you to keep the business running at a profit, which is the entire point. It’s the only way to see if your business is creating enough revenue to cover expenses.
There’s no such thing as too much budget planning, especially when starting a new small business. Take your time, be thorough in what you plan to spend your money on, and most importantly – review your spending regularly so that you know if you’re on track.