What is Budgeting?
A good personal financial management strategy requires that financial plans include expense budgets. If an individual intends to manage his finances well, he should have a personal budget. A planned budget supports expense management, tracks spending, and allocates resources to responsibilities and obligations.
Companies like individuals should always have a budget that guides their business plans and operations. Every business plan must include a budget that shows how a company utilizes its revenues. A budget is a financial document that outlines the sources of capital, revenue projection, and business expenditure.
Pitfalls of not Budgeting
Micro-firms often fall into the trap of running their operations without a well-planned budget. Such practice causes the business to underestimate its planned expenses and makes it challenging to compare the annual performance of the business. Consequently, the business managers cannot identify trends and drivers and cannot determine if the company is growing.
Why Budgeting is Key
There are several benefits of formulating a company’s budget. These include helping the organization determine if it can fund its financial commitments. When a business outlines its budget, it becomes clear where funds go and how many financial obligations the company can undertake at a given time. A robust budget will represent a company’s debt capacity and when to begin and discontinue borrowing funds. Accordingly, without a budget, there will be firm-wide disorganization in the finances of an establishment—unplanned expenditure and financing will prevail.
Budgeting allows the company management to see future expenses ahead and plan for them. Suppose there are significant projects that a company intends to execute. In that case, the budget will help the managers to be fully aware of the possibility of financing such projects.
A budget enriches a company’s internal reports as the owners of the business and management can completely understand the company’s financial realities. Accordingly, having access to these details will help the company’s management make informed decisions. In preparing a company’s budget, the management will ordinarily get familiar with the activities of the company. This understanding informs the management of the company’s priorities—a decision to reduce the expenses of a company upon the evaluation of a prepared budget. From the details of a financial budget, a company could decide to postpone some projects to a later time more convenient for the company to incur such expenses.
A well-structured company budget reflects a company’s profitability for the period under review. The budget includes cash inflows and cash outflows. Also, the management will determine the business’ profitability trends. Consequently, it is beneficial for businesses to establish budgets and to assess the firm’s financial standing against such targets.
Elements of Budgeting
A budget is a must-have for all enterprises that desire effective decisions to understand their numbers better and ensure their firm’s financial stability. Budgets can be estimated based on historical performance, macroeconomic conditions, and the evolutionary stage of the company. Other determinants are the performance of peer companies and corporate strategy.
While historical achievements do not assure similar feats in the future, previous performance is a significant resource in developing budgets for future periods. Accordingly, it provides a telescopic view into the achievable goals and the elements that made them possible.