How Budgeting is Important in Business

Given how critical a budget is to business success, it’s amazing how many businesses overlook this task. Over 60% of small businesses in one 2018 study failed to create an official budget. The Harvard Business Review found that 27% of IT projects went over budget, and 1 in 6 went over by at least 200%! Waste too many resources, and you could be left without funds or cash flow you need for essential business operations.

WHAT ARE THE BENEFITS OF BUDGETING IN A BUSINESS?

The budgeting process should play an important role in your company’s action plan. Budgets steer business plans toward success or failure. Depending on the size and stage of your business, you may keep a single operations budget to guide the whole company, or develop detailed budgets for individual locations or departments as well. Preparing your budget is your opportunity to turn revenue, expenses, and planned growth into concrete numbers that guide all your efforts.

Preparing a master budget and tracking it against actual revenue and spending throughout the year helps you gain greater control and insight to complete more projects successfully and achieve your financial goals.

LIMITATIONS OF BUDGETING IN BUSINESS

Budgets are essential, but they can be somewhat black and white — you’re within budget limits, or you’re over them. Budgets tell you how much money you plan to spend on a particular item, but not how much value each dollar spent gives you.

ROI AND CAC: TWO NUMBERS THAT MAY NOT APPEAR ON YOUR BUDGET

Return on investment (ROI) applies to any purchase you make on your business. From software solutions to travel fees to marketing campaigns, you want to see the amount of money spent multiplying into booming revenue. Even employees show their ROI through great work.

Customer acquisition cost (CAC) measures how much you spend to acquire each customer. If a software company spends $50,000 marketing their online learning software, and 25,000 new elementary schools purchase it, the CAC is $2. If the software costs $200, the company owners may be glad they spent the $50,000.

These factors affect budget because a high ROI or low CAC can be worth some extra up-front expense. For example, paying extra to recruit top-performing staff can strengthen your sales team so you land more clients. A good budget can be the basis for setting employee ROI contributions for a given budget period. Ideally, though, you’re improving results on these metrics while staying within budget. Some businesses base employee bonuses on CAC; workers who deliver under budget get to keep a portion of the savings as a bonus.

HOW EXPENSE MANAGEMENT IMPROVES BUDGET TRACKING

Businesses that take a “set it and forget it” approach to creating a budget may not find themselves substantially better off than businesses that skip preparing a budget altogether. Effective budget management compares your plan to your actual situation and is flexible enough to respond to a changing business environment.

Expense management comes in to handle granular details that the larger budget can’t cover. You have an IT budget, but not a dollar amount for each software program you’ll need throughout the year. Your travel budget won’t itemize the cost of every flight or meal. Collecting updated expense reports along with your other financial statements tells you if your overall spending aligns with your expectations and adjust your projections for a more realistic budget. From there, you can review individual purchases to see which budget dollars are producing actual results with the best ROI.

For example, if you’re $50,000 over budget preparing to open a new location, but losing the location would mean a $1,000,000 hit to your business, budget overage may matter less than getting the job done.

WHAT BUDGETING TELLS YOU ABOUT YOUR BUSINESS