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You may be surprised to know that many businesses don’t have an annual budget in place, or I as I prefer to call it: a Profit Plan. Now, what I call a Profit Plan is a bit more detailed than just an annual budget, but we’ll get to that.

I recently spoke with a business owner and I was pleasantly surprised to hear him tell me that he had his budget all worked out for the year. Further into our conversation however, it transpired that while he had listed all his expenses for materials, rent and other overhead costs, marketing, salaries and so forth listed out, he had not included his revenue projections!

What is a budget? The simple definition is an estimate of income and expenditure for a set period of time. A budget or profit plan includes both projected revenue and projected expenses.

Why should business owners like you have a budget? Here are 3 persuasive reasons:

Achieving your top line sales goals
If you don’t know where you are going, you could end up anywhere. If you are shooting for a specific target, you are more likely to achieve it.

It’s not enough to say, I’m planning to double my business next year, or increase my business by 10% or achieve $1 Million in annual revenue.

How is that Million going to happen? Chances are that you don’t have the same goal for each month, so to just divide $1 Million by 12 does not necessarily make sense unless your monthly revenue is relatively steady month in month out and you are only projecting a small increase for the coming year.

What happens if you have a seasonal business? There are bound to be slower months and busier months. You’ll need to project income and expenses accordingly.

What if you are planning to double your business in the coming year? You’ll need to account for a ramp up from where your business is now to where you project you will be next year, and plan accordingly for increased marketing and additional staffing. You may need to add additional infrastructure in terms of office space, vehicles, or equipment.

Planning ahead by making a Profit Plan or budget will also help you to see where you might need to infuse more capital into the business in the form of loans or Lines of Credit.

Hitting your profit targets
It’s important to hit your revenue targets, but it’s even more important to achieve your profit targets. Creating a budget will help you project your profits, so you can evaluate if your plan will achieve the bottom line you need and desire. After all, those profits are necessary to provide additional compensation to shareholders/owners (you!) as well as to provide capital for future growth, repayment of debt, etc. By the way, it’s a good idea to create a personal budget, so you’ll know how much you need each month from the business in terms of salary and draws or distributions.

Adding infrastructure to your business
As your business grows, you will need to invest in more infrastructure. This may take the form of adding overhead personnel, for example a salesperson, administrative support, or a supervisor. Other types of infrastructure could be leasing an office or shop (or increasing the size of your facility) or investing in additional equipment, vehicles, or technology.

Creating a budget allows you to try out scenarios to see if your revenue projections will support the investment in overhead. You will also want to plan your marketing strategy (and create a marketing budget!) to support the revenue goals you’ve projected.

As you can see, there are many reasons why it makes sense to create a budget for your business. Beyond being sensible, it really is important to do annual strategic planning for your business. Your Profit Plan/budget is an important piece of your annual strategic plan.

Want more? Download my free best business practices guide here.