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For various reasons, many small and mid-sized businesses don’t budget.
A staggering 61% of small businesses didn’t create a budget in 2018 and around 82% of startups fail just because of cash flow problems.
Below are five reasons why budgeting leads to financial stability and success of your business.
1. Predicts cash flows and avoids surprises
Since you build a budget from your forecasted operational data, it consists of expected ups and downs in your revenues and expenses. A budget is especially helpful if you have a seasonal business or your revenue stream comes in huge chunks followed by long periods of no revenue. A budget helps you plan for when your cash levels will be low.
2. Shows bankers and investors your payback plan
A budget signals to potential lenders that you have planned and know what it takes to pay a loan back in a timely fashion. A budget also gives lenders a payback plan that is backed by substantial and reasonable facts.
3. Quickly highlights areas that need improvement
A budget helps you quickly compare actual revenues and expenses every month. With a budget as your roadmap, you can revise the variance estimates between revenue and expenses in a timely fashion to ensure they do not escalate to a large variance. You can revise your budget to take into account major changes in your business.
4. Helps in smooth running of operations
A budget helps you maintain an overview of the big picture. By comparing weekly, monthly, or year-on-year numbers, proactive managers can use a budget to guide their business decisions and even look for ways to improve them. A budget, combined with a forecast, is a versatile tool for continuous improvement in the financial success of your business.
5. Helps to project the future and take actionable steps
A solid budget guides you in discerning if the demand for your business is growing. A budget helps in understanding the amount of inventory you can afford to carry and the best time to make an investment to expand your service offerings.
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