What is budgeting?
Budgeting is an important financial management tool that is essential in achieving your personal or business goals. It creates a clear plan for your money – known as a budget.
A budget allows you to better understand where your money is coming from and where it is being spent. This plan outlines expected earnings and costs over a specific timeframe, typically a year, though, it can also cover shorter or longer periods. With a budget in place, you can make informed decisions about your financial health.
Why should you prepare a budget for your business?
Budgeting involves forecasting revenues and expenses to align with your strategic and financial goals. By allocating resources effectively, you can ensure you have enough funds to do the things you need (or would like) to do, and can identify gaps or shortcomings which will prevent you from achieving your financial objectives. This proactive approach empowers you to make informed decisions, stay on track financially and successfully achieve your strategic goals.
Here we provide some additional insights into why you should prepare a budget for your business.
- Financial planning and control
Harnessing a budget helps you – as the business owner – to plan your business finances by forecasting income and expenses. Allowing an effective allocation of resources and ensuring that there are sufficient funds to cover operations and plans. This includes estimating revenues, outgoings, and future cash flows. - Setting goals
A budget helps set financial goals and track progress towards achieving them. This should be linked to your businesses strategic plan. Goals could include things such as increasing revenue, improving gross margin, reducing specific costs, costs in general, expanding into new markets or growth aspirations. Budgets can also be used to assist in long-term planning by setting aside funds for future projects or investments. - Managing cash flow
Forecasting your future cash inflows and outflows helps your business manage cash flow, ensuring that there is enough liquidity to meet obligations and avoid cash flow shortages. By staying proactive with your finances you can make confident decisions and enjoy peace of mind regarding cash management. - Resource allocation
A budget empowers you to prioritise spending in line with your business’s strategic goals and available resources. This helps to ensure those resources are used efficiently and effectively to minimise wastage and maximise returns. - Cost control
Budgeting can assist with identifying opportunities to reduce costs and improve efficiency. By pinpointing areas of overspending or waste, you can take proactive steps to make adjustments and enhance your business’s financial health. - Decision making
A budget can assist in decision-making processes often allowing the business leaders to make informed decisions in respect to potential investments, hiring, marketing plans, change management, pricing, debt servicing, capital investment and other strategic initiatives. - Risk management
Budgets can help the business anticipate and mitigate potential financial challenges and risks. This can include setting aside funds for emergencies, future plans or identifying areas where costs might increase. - Confidence with leadership
A well-prepared budget that has input from management or key personnel can increase buy in, enthusiasm and morale. It demonstrates that the business is well-managed and has a clear plan for achieving its financial goals. That it has thought about where the business currently sits and its ability to financially achieve its strategic plans. This facilitates better communication within the business by aligning departments with overall objectives and financial plans. - Long-term sustainability
A budget can help to ensure the long-term sustainability of your business by promoting prudent financial management and strategic planning at board level. Preparing a financial budget will also demonstrate financial stability and planning to key external parties, such as stakeholders, shareholders, regulators, and creditors.
How can you implement and manage your business’s budget?
Once you have prepared the business’s financial budget, it is important to ensure the budget is effectively implemented and managed.
This includes undergoing a review and obtaining approval from the board or upper management prior to implementation of the financial budget. Communication is critical as is the roll out of the information contained within the budget to all relevant departments and team members. This will ensure buy-in across the business, especially if they have been involved in setting their departmental budgets.
All financial resources should then be allocated in accordance with the budget, including funds to various departments, projects or teams. Accountability is a key step and ensuring that departments and managers are held responsible for adhering to their specific budgets and continued monitoring of such is very important.
Ensuring proper financial controls and procedures are established or are in place to monitor revenues and spending and to ensure it aligns with the budget are also essential. Ongoing monitoring and tracking of actual performance against budgeted figures (both income and expenses) helps to identify variances or potential issues early across your business. It is important that regular financial reports are issued to provide insights and measurement into the business performance which then can assist in identifying areas of improvement and success.
What insights can be gathered from having a budget?
Having set a budget makes it easy to understand your overall business performance by looking at the budget variance analysis and identify overspending, underachieving of revenues, changes in the business environment, etc. It also means you can make informed decisions if short-term or immediate decisions need to be implemented.
A thorough budget also means that you can look drill down and assess the performance different specific departments and projects, based on their alignment to budget. Recognition and rewarding success for those that meet or exceed expectations to budget is another avenue to improve culture and potentially performance.
Next steps
Having a budget is a vital tool for any business. It can assist with financial planning and modeling, cash flow management, risk and performance management, cost control and evaluation measurement contributing to the overall success of the business.
If you are interested to learn more about how a budget could help your business achieve its true potential, speak with your local Nexia Advisor today.
