To some business owners the word “budget” is intimidating. It’s a big undertaking to bring together all the business’ financials for the past year or more, analyze them for their standard expenses, one-time expenses, total all streams of revenue, and to determine whether they were profitable in the previous year. Some years business owners might be excited to put all this information together so they can see just how much profit they made. Other years, this task may not be quite so exciting.
Why You Need A Budget
The exciting reason to create a budget is to set growth goals for the business and actually reach them. When owners have expenses under control and understand the business’ numbers throughout the year, it is much easier to know exactly what actions can and should be taken to adapt to the different seasons of the year. By adjusting to these ebbs and flows of a year, business owners can make plans to try to ensure that the business is not spending more than it is making each month.
How To Compile & Analyze The Past
Each year, a business owner should be able to compile management reports that show certain details about business that year. If a business owner is using an accounting software like QuickBooks Online, a Profit & Loss (P&L) report should be available for each month and each year of accounting tracked in the program. This report will be crucial in reviewing the business’ numbers each year. If an owner has entered income and expenses into the accounting program for multiple years, this report should be available for each year entered.
In addition to reviewing the previous years’ expenses, owners might want to take this time to review the businesses’ numbers over the last three to five years. Reviewing expenses over a period of several years gives an owner a much clearer picture of the business’ trends, whether certain events, like the start of school or Christmas, affects the amount of business done around that time.
Using Past Numbers For The Future
Once an owner has the business’ P&L, it’s time to analyze these numbers. Regardless of whether any of the previous years were profitable or not, this is the time for the owner to recognize and prepare for the trends discovered when reviewing previous years.
As a business owner reviews the numbers for previous years, it will also be crucial to find which months are profitable enough to put a little of that profit into a savings account for a rainy day.
The Best Part of Creating a Budget
So far, the process of setting a budget has been very reflective and taken into account being prepared for expenses. However, now that the business is prepared to remain fully funded throughout the year, the owner can budget for exciting things: owner profit payments and investing in business growth.
Once an owner has a clear idea of what it will cost to just continue to remain in operation, the owner can review the most profitable streams of revenue and invest in increasing those. If there is a particular service that sells extremely well, an owner can explore options to invest in adding options to this service. They can also look to invest in continuing education in related skills to allow them to add related services to their business. Alternatively, if there is a market that is doing particularly well for the business, the owner may consider adding another location within this market to increase traffic, and ideally increase profit in that market.
Business goals come in all shapes and sizes, but without taking the time to review the revenue and expenses for the previous year(s), it can be nearly impossible to plan and prepare to reach the business’ goals. Budgeting can be a daunting task, especially coming off a year that may not have been as profitable as an owner would have liked. However, it can be easy to compile the numbers and reports necessary to set a budget by using a program like Quickbooks Online. After a strong planning and budgeting session, and sticking to the budget for the year, a business has the chance to see its growth goals, come to fruition. This can be the most exciting part of being in business for an owner, and the time investment into setting and reviewing budgets is what can make it all possible. What gets measured gets done.