Budgeting:
All business owners should recognise and understand the importance of preparing and maintaining a financial budget for their business.
Budgets are an essential financial planning tool, a method of control over the day to day operation of the organisation, and an opportunity to involve people at all levels in the budget planning and implementation process.
In many cases of business failure the major contributing factor was the inability of the organisation to either comply with a predetermined budget, or a failure to prepare a budget at all.
Budgets have a number of purposes, including:
- Assist organisations control financial and overall business results organisation
- Assist in decision making
- Aid in coordinating various functions and activities that make up any organisation
- To assign responsibility to managers or staff for achieving levels of performance, and to authorise amounts that those staff can spend
- Motivate managers / staff to obtain commitment to achieving budgeted goals
- Increase the credibility of the organisation in the eyes of third parties
Budgeting and budgetary control can be regarded as a combination of forecasting, planning, and monitoring financial results against plans.
By forecasting aspects of revenue and expenditures (using available information), and then following up with regular comparisons of actual results against budget, managers can determine what action if any should be adopted in order to:
- Identify and address areas of poor performance
- Improve areas which are performing well
- Foresee any need for additional financing
- Anticipate and plan for growth and/or changes in business circumstances