Every company should have a budget, from sole traders to SMEs to blue-chip, a budget is crucial in all aspects of maintaining profitability. Budgets can be overwhelming, and become much more varied at the largest scale of businesses, but they are equally important for every size of company.
A common misconception that many businesses encounter is the concept of a budget itself. Many people assume a budget to be the sheer spending power that a person or entity has, such as a household shopping budget. The definition changes slightly for accountants, with a budget being the summation of revenue, overheads, and forecasted profits. A company budget isn’t the amount of spare money it has, it’s the amount that they can afford to use while still remaining profitable. A business owner can see the numbers in the company account, but an accountant can calculate how much of that money they can afford to venture.
Budgets are used in every aspect of corporate accounting, from operation planning to goals to performance evaluations. As a company grows organically, the budget is constantly changing and needs updating for added expenses and incomes. A budget also provides an important buffer incase anything untoward happens, such as illness or litigation; a good accountant will accommodate for such expenditures in their projections.
Small businesses need alot of the same information that a large business needs, but with added pressure. For a startup, a budget is one of the most important tools at your disposal; any mistakes made early on in a business resonate throughout the years, and can cost a company its future. In the early stages of a business, any investment carries an inherent risk, as the budget is not endless, but as the company grows this risk is lowered.
As with any investment for a business, thorough understanding of the potential risks and rewards can only be accomplished by an accountant, using a budget and financial report. Projections for future growth can be mapped by utilizing the yearly budget reports, along with market analysis, and can show a company the size their budget will likely be down the line. This type of analysis is vital for the growth of a company, as it allows purchasing or investing as soon as it becomes available, rather than waiting to figure out if the company can afford it.
Another key aspect of budget reports is to collate the profitability of individual departments into a final report. This report, often known as sector analysis, can take multiple iterations to become accurate (average of 4.2) but gives a clear picture of the each departments value in relation to the company. Some of these figures will be obvious, such as marketing and sales for an SME bringing in the most revenue, while other departments such as PR and HR will show a net loss in profitability on such a report. These reports should always be analysed by a member of the company or third party, as revenue is not the only critical factor in a companies survival.
One of the most important uses for a budget is a relatively simple one; targets for company members. If a company needs to grow by 4%/annum to remain competitive, and a single department shows no growth over quarterly analysis, then there must be serious consideration into expanding the department. The communication of such goals is always better to express numerically, as vague ‘your department needs to be more productive’ statements do not help anyone, while target numbers are a measureable goal.
Budgets do not have to be an intimidating prospect, and should be a prerequisite for all companies in order to survive. For small businesses it may be best to hire a trusted third party, while large companies would do best to employ an in-house accountant for the role.