A business plan is essential when taking your great idea from thought to making money. It guides how you think about your business before and after its creation; it forms your decisions with a blueprint to gauge success.

Vince Iannello says that one of the most critical aspects of your business plan is the budget. It sets the standard for what you think and hopes you’ll spend monthly. It, too, is a way to gauge your business and observe your costs over time. A budget should never be put in a filing cabinet, and you should reference it often.

Let’s cover a few reasons a budget is essential in your business plan.

It sets a baseline

Going into a new business, you know how you want the company to grow and perform. You’re undoubtedly starting with an idea of a space you need to lease, equipment, office supplies, and any raw materials you might use. Once those numbers are on paper or in a spreadsheet, that baseline of monthly costs is established. Should the price of one item fall out of line with the initial estimates, you’ll know it, look to why it is out of line, try to control it, and adjust your budget as necessary.

It is a basis for involvement with management staff

Vince Iannello says that if you have a management staff, make them aware of the budget so they also have a comparison point for the items they purchase for their departments. In meetings, it is necessary to review the costs they see in the business, discuss what factors might be making some higher than they should be, and work for a resolution together.

Sometimes a manager will move a business unit to a more expensive product because it produces greater efficiency, cuts other costs, or fosters a better customer experience. The management meeting is a great time to discuss the change and update the budget if the purchase makes sense.

A budget helps you adjust your financial modeling.

Your financial statements might not break down expenses to include every detail, as they shouldn’t. The budget most likely includes moderate and more significant expenses. Knowing these costs, you can determine what reducing that cost will save you monthly and model it in your financial statements to see the true impact.

As you model reduced costs over multiple business expenses, your financial statements could show a tremendous improvement, but don’t forget that sometimes things can go wrong. Modeling scenarios where an expected price increase is coming is equally as essential.

Vince Iannello explains that a business budget is a tool you’ll use throughout the life of your business and something that will always help improve profitability or control costs. It fosters involvement from managers, helps financially model changes in the business’ operating environment, and provides the baseline to compare current costs.

You needn’t only do your budget at the start of the business. Start one now if the company doesn’t currently gauge itself against a budget.