Why should you establish a 12-month budget for your business?

Brent Szalay

Establishing a 12-month budget: will empower quality decision making in your business because it will give you clarity and control over your finances and alleviate any anxiety from the unknown and guess work.

Without a budget, or by not investing the time to set one up properly, you essentially operate blind and increase your risk exposure. It’s quite common to see business owners making poor errors based on gut instinct (i.e., emotion), rather than factual data (i.e., what the numbers are transparently informing you of what’s happening in your business).

Benefits of creating a well-developed 12-month budget are:

1) Planning: A budget inform your direction towards your financial goals; it should align with your overall vision and 12-month action plan for your business.

2) Control: It will allow you to measure and evaluate ‘actual activity’ against activity and results that you expect to see. The data will enable you to make more informed decisions, because you’ll be able to see what activity are producing results (and return on investment).

3) Progress signifier: Your budget will be a key management tool that will empower you to assess and regularly report your business performance, which you can then use to communicate how the business is tracking with your team and key stakeholders. Your budget data will provide you with clarity of your progress, signifying that you are (or are not) on track towards your set goals/objectives and then empower you to informatively act based on any gap or bottlenecks.

Practically, by creating a 12-month budget you will be able to improve your financial literacy and see:

  •   how much it costs to operate and run your business;
  •   where you can invest to improve your business, and;
  •   how much you can afford to pay yourself and shareholders.

You will also emotionally gain:

  •   Greater confidence in your everyday business decision-making (knowing when you can afford to hire someone, for instance).
  •   Insight to make more informed managerial decisions, such as do you have enough cash to fund business growth.
  •   Peace of mind because you will have clarity of your cashflow; and your ability to be able to comfortably pay staff, suppliers, etc. (in the case of any short falls, the early visibility will empower you to act swiftly, and work with your Accountant to look for ways to access cash).

Further to this, setting this budget will allow you to:

  •   Better allocate resources (by department, products, service streams etc.)
  •   Encourage Managers to think long-term, rather than be too focused on the day-to-day.
  •   Evaluate performance of your Managers: by comparing budget vs. actual expenditure, which you can then use as a reporting tool to hold your team accountable.
  •   Prepare for busy seasons and slowdowns in your business (you’ll learn to see the patterns behind why some months are busier compared to others).

In summary, with a 12-month budget, you can see the difference between what you plan to achieve, and what the month by month reality is!

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