The 7 Reasons Why You Need to Budget

Posted on September 21, 2013

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This is the first of several posts on small business budgeting.

Budgets can arouse strong negative feelings–in big companies due to sometimes tortuous processes, in small companies due to being perceived as unnecessary bureaucracy, and at home because–well, who likes personal budgets?

However, we believe that budgets can be extremely useful in any size business, and many of our clients have become firm believers in the value of budgeting since we helped them put budgets in place.

Here are 7 reasons we think budgets can be valuable:

1. To improve the likelihood of achieving your financial goals. Many studies have shown that writing down your goals significantly increases your likelihood of achieving them.

2. So you have a basis for knowing how much to pay yourself.

3. So you have a basis for knowing what raises, bonuses, and other benefits you can provide to your employees.

4. So you have an objective way to handle bonuses or profit sharing for your managers and employees.

5. So you have a basis for whether and when to hire new employees and to invest in new equipment and vehicles.

6. As a means to manage and control costs. There is an old saying, “What gets measured gets managed.” In our experience, just setting and monitoring a budget for an expense item will cause less to be spent. For example, a few years ago when we did our first budget with a new client, we were surprised at how much was being spent on office supplies. No one could explain why, and we were focused on larger items so it didn’t make sense to spend time analyzing the account. We expressed our concern to the Office Manager about the high amount and budgeted for a modest decrease. As it turned out, the actual expense dropped far more that we had budgeted. The savings from that single expense alone more than covered our time to implement the budget process.

7. So you have a convenient way to say “no” when you need to. Business owners are constantly asked to spend money–on donations, on discretionary employee requests, etc. Being able to say, “I’m sorry, we don’t have that in the budget,” is usually an effective way to avoid an unwanted expenditure without causing offense.

In the coming weeks, we’ll explain our approach to implementing simple yet effective budgets at our clients.

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Posted in: Budget