Every financial entity, regardless of its size, runs much more efficiently when following a well-researched and structured budget. Countries use budgets as do multi-national corporations, public and private companies, small to medium businesses and households. The entities that survive economic and natural disasters, changing customer moods and technology innovation use their budgets as indicators of strengths and weaknesses. A budget, in a nutshell, is a measured and disciplined approach to accurately estimating income and expenditure over a fixed time period. Without it, important financial decisions are often based on emotion and guesswork rather than on facts and data.
If ever there was an occasion where a solid, well-researched budget was essential, it is at the start-up phase of a new company. It is important for a number of reasons but at this early stage, the budget is the basis for the business plan. Without one or both of these documents, it is almost impossible to get a business loan from a reputable lender.
What Does a Budget Actually Do?
Putting together a budget forces the budding entrepreneur or business person to quantify issues that up until now may have just been vague considerations. Business budgets in Australia start in July and end the following June. They are usually presented as a spreadsheet with the expected income and expenses all listed under individual names. How well the budget represents reality is the key issue in a business start-up, since there is no financial history yet available to guide the business owner. This forces the owner to ask some serious questions about the viability of the business idea.
Fixed expenses such as rent and loan repayments, and the variable expenses of producing and getting the product or service to market should already be known or closely estimated. These are the “what” questions that form the basis for the “how” questions, for example, “How will I generate enough business to meet the income targets?”; “How can I reduce expenses to generate more profit?” The answers to these and many other questions can be found, with assistance from an accountant.
Lending Institutions Look for Evidence of Planning
A detailed and properly structured budget shows a lending institution that the business venture is likely to be viable. It indicates that all the important questions have been answered and assigned a reasonably accurate monetary value. In conjunction with the business plan which details market research, a SWOT analysis, operational and financial plans and timelines, the budget provides the evidence that it can service the business loan.
Once the business is operational, adjustments are made monthly to compare the budget against actual income and expenses. The owner can see if the original expectations are being fulfilled or if adjustments need to be made. If income is higher and costs lower, there could be an opportunity, for instance, to make additional loan repayments on the business loan. This will free up operating capital once the loan is paid out.
Properly structured, and using figures that are as accurate as possible, a budget is an excellent tool for monitoring profit or loss. With the accounting software now available, this can actually be done on a daily or weekly basis, if needed. This puts the owner in complete control to make crucial decisions that could mean success or failure.For more information on business loans, click here.
