By Joanna Lidback, Business Consultant
I’ve had a few people ask in the past – what’s the use of a budget? What happens, happens. It is what it is… right?
Surely a budget cannot change market forces that are beyond internal business control – but it can lend itself to making changes in order to drive profitability. When it comes to preparing a budget, here’s a list of reasons to just do it:
- Forecast a profit or loss and plan accordingly. If you are expecting a profit, great! What will you do with it? Will you put it back into the business as capital replacement? Will it pay down some debt? Likewise, if you expect a loss, how will you fund it? Can you use vendor credit? Do you have an operating line of credit? Do you have savings that you can use to cover? Also, when do you expect to be back in the black?
- Track spending and or income. Whether it’s a specific line item or the timing of when money comes in or goes out the door, a budget can help you accommodate both. Are you looking to clamp down on shipping costs? Do you need to cover spring planting costs? Knowing how much to expect can help map out your expense year through a budget.
- Employee management tool. A budget is an excellent way to hold people accountable, either to specific goals or within specific limits. Along with tracking results, it can be tied to performance reviews and expectations. In fact some sales-based companies use total sales numbers to determine compensation levels. It’s important to not only have a sales forecast, but to also plan for labor expense.
- Evaluate performance of specific areas. Where do you excel? Where do you face challenges? A budget can be used to set and monitor the performance of a specific area, especially one in which you are trying to improve.
- Sharpens understanding of operations - what drives your numbers? How do all of the pieces of the puzzle fit together? What drives your bottom line? How does a change in one area affect others? Should you spend more time with the nutritionist or the insurance agent or both? Where is the juice worth the squeeze?
- Provide for funding proposals/projects. Many grant foundations, funding programs, and lenders require a project budget to understand how funds will be used. You won’t be considered for funding without one.
- Helps meet goals. What good is a goal if you can’t measure it? A working budget is a great tool to track progress toward a goal. For example, are you looking to keep your labor expense under a certain percent of total income? Are you on target to meet annual sales goals?
- Facilitate discussions. Communication is always a top challenge for any company. A budget can spark important conversations and allow you to dive deeper into a subject. For example, fuel cost estimates are way off – is it just a math error or is there an underlying equipment issue?
- Helps avoid surprises. Sensitivity analysis takes your budget a step further by asking “what if” questions. What if milk price went down $1/cwt? What if it went up $1/cwt? What if interest rates jumped 3%? How would it affect your bottom line? This can help prepare you for various shocks to the marketplace.
- Can motivate to be creative/use resources more effectively. Perhaps you need to figure out how to work within a certain means. By testing out new strategies using a budget, you can see how this may affect your bottom line. Several dairy businesses are making some big changes in order to get through low milk prices. A budget can help see if the changes will be worthwhile.
Whatever the reason you choose, a budget can be used in many ways and in several forms. If you have a dairy business, feel free to try out our annual budget template: click here
, and stay tuned for more budget templates in the future!