Business Budgeting Basics
Mark Samowitz
Finance for Non-Finance Managers Training | 33,257+ Managers in 36 Countries Trained | Learn More at accountingmadeeasy.co
In simple terms, a budget is a financial plan for where a business wants to go and how it's going to get there.
It’s a roadmap for the businesses to achieve its financial and operational goals by coming up with an estimate of income, expenditure, available capital, and net assets for a set future period of time. By building on past performance, a well-crafted budget provides an effective tool for forecasting ahead.
There are several business advantages to producing a detailed budget:
Planning Ahead:
One of the most important benefits of a budget is that it allows businesses to plan for the future. The budgeting process requires companies to define their objectives more precisely, which helps articulate their vision, strategy, and goals.
Keeping Score:
Your budget acts like a scorecard. It lets you see how your actual performance stacks up against what you expected. ?It provides a reference point and benchmark to monitor performance. By comparing actual business performance to expected/estimated performance, senior management can gain transparency and clarity. It's important for management to understand why reality differs from expectations, both good or bad.
Spotting Speed Bumps
Budgeting also helps identify problems before they occur. Knowing potential challenges in advance is a big advantage in assisting management to navigate these issues successfully.
Holding Everyone Accountable
A budget can be a powerful tool for both accountability and staff motivation. By involving individual managers and departments in the budget-setting process, they become responsible for their own cost centers and are more likely to buy into the plan. This allows for actual results to be tracked against the plan, enabling monitoring of both departmental and overall performance. Additionally, setting sales targets and involving the sales team in the process ensures accountability and clarity. When everyone's in on the budgeting action, they're more likely to stay on track. Plus, it gives each team member a stake in the game.
Make Smart Moves
With a budget, decisions become easier. You can adjust your plans based on how things are going financially. Management are able to set and change priorities as needed by managing the company’s finances, cashflows and operations more efficiently as they compare actual performance against the budget plan.
Playing Tetris with Resources
A comprehensive budget encourages management to fully consider the allocation of appropriate resources to projects. This helps with staffing requirements and matching resource to activity.
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Impressing the crowd
A well-presented annual budget reassures 3rd party stakeholders, such as banks and investors that your business is strong, well-managed, organized, and reliable.
Keeping Things in Line
An annual budgeting process, involving all relevant internal teams within the organization, encourages cross-departmental coordination and sets a firm framework with deadlines which aids the sense of discipline and structure within the organization. It helps keep the business running smoothly year-round, like a well-oiled machine.
Boosting Performance ?
Ultimately, a good budget helps drive profitability by enabling improved focus on increasing sales and managing costs.
?So, while the budgeting process may feel tedious, It's really an investment in the future success of the business and needs to be done accurately with thought and care.
That's all for now.
Best,
Mark
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