A business budget not only helps you project annual expenses but lets you see costs as they will occur. For example, averaging your insurance premiums per month helps you set average monthly revenue goals. Budgeting the exact amount of money to pay premiums in the months they come due helps you manage your cash flow to ensure you have money on hand to pay your bills each month. Budgets also let you forecast your annual bottom line using more than one revenue scenario.
Market conditions such as your competitors’ prices aren’t the only parameters you need to set your fees, rates and prices. You must know your manufacturing and overhead costs before you set your prices. A budget lets you project your utility, health care, marketing, rent, wages, debt service and other costs so you can learn the true cost per unit of making your products or delivering your service. Once you know this, you can set your prices to make the profit you want. If this price is too high for you to be competitive in your marketplace, you can use your budget to identify areas where you can reduce your costs.
Capital and Credit Procurement
Few venture capitalists, banks, suppliers or other lenders will give you money or credit unless you have financial data to demonstrate you are a going concern. Unless you have assets you can use as collateral, you’ll need to show financial statements that prove you are stable. If you are a new business, or are expanding, a budget will show potential partners how their participation will affect your sales and profits.
A budget lets you track your business’ performance throughout the year, allowing you to make necessary changes to rein in costs or increase spending to take advantage of growth opportunities. If your marketing is effective, a budget will let you know if you have funds available to increase your advertising to grow your sales. If your sales are slow, a budget identifies areas where you can cut discretionary costs to make you more competitive or tide you through slow periods.