Importance of Budgeting and Financial Management for Small Business

In this time of economic hardship, small businesses and micro-businesses are among those being hardest hit – particularly with their inability to access lines of credit to help maintain effective cash-flow.  Therefore, it is imperative that these business owners take the steps necessary to budget and effectively manage the funds they do have available.

However, it is a common occurrence that small businesses, particularly micro-businesses having 10 employees or less, tend to shy away from developing an operating budget.  Frequently the businesses are so small or so new that the owners are convinced they have no way of projecting their revenue and therefore have nothing to budget.  This is a serious mistake! 

Budget graphicIn spite of a ‘supposed’ inability to project revenue, the business is still incurring expenses, therefore it needs to develop a basis from which it can discern business trends and identify opportunities which will enable you to make decisions about how you are running the company.  A budget is one of the most important tools to help you do this.

To help you understand the value of developing a budget – and managing that budget – for your small business we offer the article below which recently appeared on Entrepreneur.com.

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Even startups need to forecast and plan–especially now.

By Asheesh Advani   |   Entrepreneur Magazine – July 2009

Most entrepreneurs detest budgeting. Working on something as old-fashioned as an annual budget confines the imagination and limits flexibility. Still, budgets are more important than ever in today’s market environment.

I’ve heard all the excuses for avoiding budgeting. “Startup cash flow is too unpredictable.” “One big customer order could change the course of the business, so what’s the point in setting a budget?” “I can’t predict the capital market, so how can I forecast how much cash I’ll raise and be able to spend this year?”

In my experience, these excuses mask the fact that right-brain creative entrepreneurs just don’t like left-brain financial planning. So, if you’re running your startup solo, you should force yourself to develop a budget to hold yourself accountable. Here are three reasons why:

  1. It will help you to become a better manager. When done properly, budgets can be extraordinarily useful in testing and refining your ability to forecast and manage. While boards like to use budgets to hold managers accountable, the startup CEO can use budgeting to test whether the drivers of his business hold true. One straightforward way to do this is to set an annual budget with a set of key assumptions (e.g., number of new clients; product price), then reforecast the year every quarter by updating those assumptions with the latest results.
  2. It will help you raise money. When I raised money from angel investors or institutional investors, I learned firsthand the importance of budgeting. Investment terms often specify that management must provide the investors or the board with an annual budget. Developing a company culture that tracks results to budget will help you meet and exceed the expectations of your investors.
  3.  It will help you avoid running out of money. The No. 1 risk to any startup is running out of money. If you’re like most entrepreneurs, you’ll fluctuate between a conservative reality and an aggressive dream state, which keeps you motivated and helps you inspire others. When you build your budget, start with expenses, not revenue; they’re much easier to forecast. This will keep you grounded and reduce your risk of running out of money.

Asheesh Advani is president of Virgin Money USA, author of Investors in Your Backyard and founder of CircleLending, which pioneered the business of managing person-to-person loans and mortgages and was acquired by the Virgin Group.

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4 Responses to “Importance of Budgeting and Financial Management for Small Business”

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  4. AJ Perisho (@ajperisho) Says:

    Nice post!
    The budget keeps you honest.
    This is true in the marketing work I do with clients, and the business as a whole.
    Thanks for sharing :-)


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