The Importance of Budget Development for Businesses

Small businesses are the backbone of the economy, but they tend to have high failure rates. Data from the Bureau of Labor Statistics (BLS) reveal that approximately 20 percent of new businesses fail during the first two years of launching, 45 percent fail during the first five years, and 65 percent fail during the first 10 years. Only 25 percent of new businesses make it to 15 years or more.

While certainly some of these failed businesses are due to misreading the marketplace, many other businesses with otherwise solid plans fail due to a lack of budgeting skills on the part of their founders. For this reason, it’s important that new business owners either take a crash course in budgeting to become as knowledgeable as possible or reach out for help to professionals. In this blog, we’ll examine some of the highlights of preparing a workable budget.

Creating Comprehensive Budgets for Operations

Early in the launch of the business, it’s critical to create a comprehensive operating budget, which means careful evaluation and assessment of existing revenue sources. This involves analyzing any historical revenue data to identify trends and patterns. (Of course, this can be challenging if the business is brand new.) This is a good way to identify which revenue sources are generating the most income and which ones may be underperforming and leading to losses. From here, you’re in a better position to move to step two: allocating resources.

Allocating Resources Effectively for Maximum Impact

Many small and new businesses struggle to understand how to best allocate resources, frequently opting for too much or too little for operations. Understanding and pinpointing this delicate balance requires continuous adjustment and real-time responsiveness to the marketplace as well as product needs. Getting this balance right ensures that resources are being optimally utilized, preventing both surpluses and shortfalls – signs that a budget is improperly balanced — and finding an ideal position for project success with precision and efficiency.

Adapting Budgets to Changing Market Conditions

As mentioned in the previous section, budgets should never be static. What worked last year may not work this year, so it’s important to regularly evaluate the budget and make adjustments as necessary. Ideally, you want to create a budget that is adaptive to changing market conditions as well as changes to your unique business needs. To do so, it’s important to remain informed and up to date with what’s going on in your industry, evaluate your financial position frequently set realistic goals, and continually analyze your expenses. It may ultimately become necessary to diversify your income sources in response to changing markets.

Seek Professional Advice

Reviewing and adjusting your budget regularly can be a time-consuming job that may get in the way of working on your company’s core competencies. Seek professional advice if necessary to help build a solid budget, analyze it for pitfalls, and adjust it as necessary. DOAAR is a small business bookkeeping, tax, and consulting services firm, with an additional focus on its clients’ finances. Specializing in bookkeeping, controller, and CFO services, DOAAR’s offering spans daily accounting, month-end close, complex financial modeling, and oversight. From execution to analysis and strategy, DOAAR provides clients with a powerful and fully integrated back-office accounting solution. We have locations throughout California and the rest of the U.S. Visit our website for more information or to contact us.