Brian Clarke of H&J CPAs discusses the importance of budgeting for small business owners.
One of the most common things that small business owners do not do on a regular basis that they should be doing is budgeting. While this sounds very basic, consistently budgeting and, more importantly, utilizing that budget is extremely important.
Very often, the business owner does not regularly look closely at the financial statement but instead looks only at the bottom line to make an assessment of how he or she feels the business is performing and to form an expectation of where the business is headed. You may ask, “What’s wrong with looking at the bottom line because it’s the most important thing when it comes to running a business?”
Let’s look at a very basic example that illustrates this point. A company generates a significantly increased 2018 profit because they were fortunate enough to secure a few very large jobs during the year that inflated their 2018 sales and profitability beyond what they had ever experienced in the past. Due to an expectation that those large jobs will reoccur in 2019 as well as a few other perceived opportunities, the company expects and, therefore, budgets that in 2019 revenue will increase by yet another 15 percent over 2018.
In order to fulfill those 2018 jobs and prepare for the additional 2019 revenue, they hired several additional full-time employees. A few months into 2019, it is learned that the large jobs from 2018 will not re-occur during 2019. Since a 2019 budget was in place and the owner was paying close attention to that budget on a regular basis, he knew that the news that the large jobs would not re-occur in 2019 required that the budget for the remainder of the year be closely examined to determine if there were other possible sources to immediately replace the lost revenue or if there was a need to eliminate some of the costs that were put in place to service a now inflated budgeted revenue amount.
A budget is similar to a roadmap or a GPS in your car–you plot the path that you wish to take but, when the course changes, make adjustments in order to reach your destination. By utilizing the budget, you chart a course for where you want to go and make the necessary adjustments along the way.