Are Small Businesses Too Small for Budgeting?

Budgeting is a crucial tool for businesses, essential for financial planning and operational control. The U.S. Bureau of Labor Statistics indicates that 50% of businesses fail within five years, often due to inadequate budget planning. While traditionally associated with large corporations and governments, modern tools like QuickBooks Online and Fathom have made budgeting accessible and beneficial for small businesses. But why are so many small businesses still hesitant to implement these vital practices? Is the juice worth the squeeze?

Originating in 18th century England to control government spending, budgeting, or a “bulga” as they called it (literal translation = “small purse”), evolved over time to manage business costs and cash flows. Traditional budgeting methods developed for large companies can be too rigid for small businesses, which benefit more from flexible approaches like activity-based budgeting and rolling forecasts.

Small businesses face unique challenges depending on their size, age, and stage of development. Effective budgeting helps manage limited financial resources by coordinating and prioritizing spending, crucial for businesses with variable cash flows and limited credit. Early-stage businesses focus on survival and cash management, while more mature ones use budgeting for strategic growth. For the average small business, budgeting checks the boxes of three important management activities: planning, controls, and performance evaluation.

Planning is a core part of budgeting, aiding in resource coordination, production management, and pricing. It all starts with the sales forecast, which will serve as a guide post for all other aspects of the budget: production budget (direct materials, direct labor, and overhead), advertising & marketing, personnel/resource planning, etc. Budgeting also involves management controls, allowing businesses to compare expected results with actual performance. This helps identify issues early and take corrective action. Lastly, performance evaluation through budgeting helps small businesses set benchmarks and measure progress. QuickBooks Online and Fathom provide essential data for informed decision-making and employee motivation. With these tools, small businesses can now access financial resources that were once exclusive to large corporations, enabling better strategic planning and profitability.

Budgeting is no longer just for large corporations. Small businesses now have access to powerful tools which simplify the budgeting process and provide critical insights. By embracing these modern solutions, small businesses can better plan, control, and evaluate their operations, ensuring financial stability and facilitating growth. The key to thriving in today’s competitive market lies in leveraging these accessible resources to make informed, strategic decisions.