Anyone who has ever tried to run a business should know that the ability to formulate a working budget is one of the key skills of an entrepreneur. Whether you are operating on the side as sole trader, with a relatively small capital outlay and no employees, or you are the chief financial officer of a large organisation with many employees, it always makes sense to put some projections and paper and work out what exactly it is costing to run the business. In today’s hectic world of globalised economies and lightning quick transactions, the picture of the old shopkeeper tallying his accounts in his head seems very, very far away.
There are essentially two reasons why budgeting is so important.
Firstly, budgeting allows you to plan. It may sound overly simple, but the reality is that a business is seldom static. There is either potential for growth, or it is time to cut back slightly. In either case, you need to know exactly how much of an adjustment to make, and that is where a proper budget becomes so important. By working out the exact figures, you can see how much a projected expansion will cost, and how much additional revenue it will bring, or by how much you need to reduce costs in order to make the enterprise more profitable. Putting it all on paper is the first step in getting there – things change daily in South Africa.
Secondly, because a budget is essentially a set of projections, it allows you to test the performance of your business against the realistic benchmarks that you have established in your budget. If you aren’t achieving those targets, it is a lot to easier to work out why when you are aware of the problem in the first place, instead of being taken by surprise when you come up short at the end of the year. A budget can therefore be used for a variety of purposes, including motivating sales staff and disciplining other production workers who are operating over cost.
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