In the world of small business, it is very natural for entrepreneurs to take risks with their finite resources and finances. Sometimes, though, even the cleverest businesspeople can lose track of their expenses and not make a profit despite their investment.
This is where the allocation and prioritisation of expenses – also known as budgeting – comes in. Although it may be fundamental in financial management, not all entrepreneurs seem to find the right balance in their budgets. The Financial Times reports that only half the businesses surveyed by US research firm Clutch have a formal budget. Proper financial management can make or break a business, so here are some great reasons why businesses should learn to get their budgets right:
- Financial Preparation
Allocating money for essential expenditure such as taxes, payroll and overheads beforehand lets you set aside an untouchable part of your income. Also, set aside a certain amount for emergencies to prepare for unexpected events.
- Financial Health Assessment
With essential costs accounted for, you can then weigh these expenses with what your business is currently earning. The difference – be it a surplus or a deficit – lets you determine whether or not you have the capacity to take financial risks while being able to assess whether or not your business is doing well.
- Better Financial Decision-making
When you have a budget that tells you how much you have to spend on certain items, you wind up being able to make the best decisions for your business. You get to determine your priorities and whether or not certain expenditures are worth pursuing. In the event of a surplus, having a set budget helps you decide the amount you will have to spend to grow your business and where you should invest it.
- Get Investors More Easily
Investors love a budget. According to Christian Espinosa, a leading entrepreneur, a properly written budget tells investors that an entrepreneur knows how to plan for the long-term and has the potential to deliver a high ROI. “No one wants to gamble with their money, and trust is essential between a business and its investors,” he says.
- Faster Debt Financing
Likewise, banks and other financial institutions would rather deal with people who have a concrete budget. These entities have long been in the business to know that lending money carries significant risks. They make it a point to do business with folks they think can pay their debts, interest, and all.