Why an Annual Budget is Critical in the Success of Your Business
It’s already 2019…Have you prepared your annual budget? If not, perhaps it is time you considered why having one could help your business and, more importantly, why not having one could put you at risk for unexpected dips in profitability. There are many reports business owners use each day to run their business, however, the annual budget is one that is often overlooked. Preparing a company budget each year is an effective, multi-faceted management tool that can assist with decision making and evaluating the success of your business year after year.
Preparing an annual budget will help you understand exactly where your revenue is coming from and how your money is being spent. With revenue tending to be variable and many expenses being fixed, having a strong grasp of this relationship in conjunction with developing adequate revenue targets will clarify what you need to do to reach your profit goals.
- Should you expand your product offerings?
- Venture into new markets or simply cut costs?
- Increase your marketing investment to attract new business?
An annual budget can guide you to the best answers to these questions.
A budget will focus your decision making toward opportunities that are important to growing your business and improving your bottom line. The attractiveness of some new ventures can be either a blessing or a curse. A new revenue stream may appear to be a windfall, but when you understand your annual budget you may realize that the expense necessary to acquire and support the new revenue may exceed the benefit. Using your annual budget as a tool to evaluate how new revenue or a significant investment will impact your bottom line can ensure each new opportunity you accept adds value rather than becoming a burden on your cash flow and resources.
Establishing an annual budget provides a benchmark to which you can compare your actual results showing whether you are meeting your monthly revenue targets and if your expenses are in line with expectations. Do you know how well you are meeting your goals? Setting revenue goals through budgeting will help you evaluate when and if you need to add additional personnel, when to invest in technology upgrades and how to handle rising costs of materials.
It is impossible to anticipate every problem that could impact your business, but an annual budget can help you establish contingency plans when unexpected events occur. Understanding how the loss of a single, large client will impact revenue, expenses and cash flow will enable you to develop a strategy for dealing with such an occurrence. Detailed knowledge of your budget can point you toward the best approach to take. Do you need a broader customer base to reduce the impact of losing a single client? Would renegotiating a client’s terms to save the relationship benefit or harm your bottom line? An insight into your financial plans over the course of the year will allow you to select the best approach to handling these obstacles.
An annual budget can help you make preparations for the future. Not only will you begin establishing a forward thinking mindset, the budget process will institute a recurring process to anticipate future expenses and investments. Buildings have necessary upkeep and repairs that do not occur annually such as new roofs or replacement of heating and air conditioning equipment. The speed of technology advancements requires regular investments in new hardware and software. Although you may not be planning for such an expense in the current year, evaluating and reserving for future expenses should be part of the annual budget process so you are better prepared when the expense is required.
Now that you know the advantages of creating an
annual plan for your business,
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