Why Budgeting is Important
What is a business budget?
Business budgets are very important to the success to your company in many ways. Business budgets are financial plans that a company sets in place on a monthly, quarterly, and yearly schedule. It is important that these are flexible and dynamic for changes in business plans and the changing market. By having a proper budget the company will be able to identify capital, estimate expenditures, and anticipate revenues. Business leaders will need to refer to the budget for measuring forecasting against the actual results, to determine what changes need to be made and when. Planning needs to include long-term needs as well. For example, if the company has a plan for a large expenditure in a year or longer then it is a good idea to start that budgeting now. A company’s master budget is broken into operating budget and financial budget. Operational considers revenue, expenses, and profits. Financial budget considers cash budget, capital expenditures, and balance sheet.
Now we will take a dive into what all goes into a budget from start to finish!
Steps to Planning a Budget
The company’s budget is going to be the foundational framework for finances, which will include past performance and give the tools to forecast for the future, by providing insight to assets, revenue, and expenses.
Step 1: Preparation
When beginning the preparation process the company will need to determine what its goals, priorities, and spending caps will be. The items that demand the most funding will be listed as high priority, like sources of revenue and expenses. These high priority items need to be broken down by month, quarter, and fiscal year. Next, depending on the size of the company, you will need to break down each department, which again will need to be broken down by month, quarter, and year. Budget preparation is also important even for season sale companies because it allows you to plan ahead and set a strategy for distributing the revenue over the course of a fiscal year.
Step 2: Evaluating Performance with Common Types of Budgeting
- Static Budgets- is a type of operational budgeting in that it takes historical data and budgets out revenue and expenses for the next time period. Typically seen in smaller companies, it takes and adds a percentage increase or decrease to forecast the next budget.
- Performance-Based Budgeting- takes the inputs and outputs per unit to reach maximum efficiency.
- Zero-Based Budgeting- starts a zero every time period and builds off of what the conditions are at that specific time.
- Variance Analysis- focuses on actuals and expected values for every form of revenue or expense and tries to bring the budget items within a certain criteria to improve efficiency
Step 3: Staffing for Budgeting
No matter how big or small, every company needs to have a group of employees that can write and maintain a budget. Although many companies think they can make it without a financial staff they soon learn they have to have one. Having a finance department will give your company a great advantage when the company needs to make decisions and will also give you the ability to have many valuable resources outside the company when other problems arise.
Step 4: Finding a Budgeting Software
The best way companies can write a detailed budget and stick to it are through financial software programs. Many times, companies use Microsoft Excel or other spreadsheet types of programs not knowing the value that other software options have to offer. As stated above, when it comes to more detailed planning by department or collaboration, Excel is limited. When looking at other programs such as OneStream or Oracle Hyperion, they will allow your company to use a more functional budgeting software to generate success and growth. These programs encourage financial health, strategic planning, and decision making. They will allow your company’s finance mangers to make quicker budgeting decisions and give you insight into what the future might hold.
What is the Overall Benefit?
To recap, the benefits that budget planning offers is unlimited but here are a few your company needs to consider.
- Financial Health
- Strategic Planning
- Decision Making
- Attracting Investors