Budgeting and Its Benefits in Business

Budget concept

Introduction

The most basic as well as efficient tool for managing your money is budgeting. It can clearly show you the ways in which you will allocate your money in different sections depending on your financial limitations. It will protect you from spending more and going into debts.

Basic Concept

A budget can act as an indicator of the employee’s performance and can provide goals and targets for achieving them. Both the organizational budget and the project specific budget should be planned in the proper way. To create a budget plan successfully, you require sufficient time in your hand. The lead time for the requests of the grants and the multi-year projects should be taken into account.

What can be the Benefits of Budgeting in Business?

# Control over the Money

A budget helps to spend and save your own money according to your control for the success of the business. With the help of the proper budgeting, you can control your money instead of the money controlling you. The tool can save you from the sudden lack of funds due to the lack of planning. If some short term benefits of the business can be sacrificed, then the long term financial goals can be achieved very smoothly.

# Forecasting

A business budget not only performs the projection of the annual expenditure but also helps you to observe the costs as they will occur. For example, if you can count the insurance premiums per month, you can rightly set your monthly goals of your revenue. It can also manage the cash flows for paying the bills of every month. By using more than one revenue situation, the budgeting can also forecast the annual bottom line of the expenses.

# Capital and Credit Procurement

To prove that you are a running concern, you are required to show the financial data to the suppliers, banks, lenders and the venture capitalists. Either the collateral assets or the financial statements can prove that you are involved into a stable business. If you have just introduced your business or have started to expand, the budget can help you to show the expected sales and the profits to the potential partners of your business.

# Price Setting

For setting your fees, rates and price, the market conditions such as the price of the competitors are not sufficient parameters. You should know the manufacturing and the overhead costs prior to setting your prices. The budget can help you to project rents, wages, health care, utilities, debt services and other ancillary costs that can help you to find out the cost per unit of manufacturing the products and delivering the services. After knowing the costs, it will be easier for you to set up the prices and then enjoy the profit as you wanted. If the price is getting too high, you can use the budget for identifying areas where you can decrease your costs.

# Performance Evaluations

By setting up the budget, you can help your employees to set up their goals for the budgeting period. You can also arrange bonuses and other incentives to improve their performances. The comparison between the budget and the actual reports can be provided to the employees with proper feedback so that they can understand their status towards the goals. This approach is generally common for the financial goals but can sometimes be added for the operational goals. For example, the budget can help to decrease the product re work rate. When the operational goals are added in the budget for the performance appraisal purpose, the evaluation system is also known as the responsibility accounting.

# Cash Allocation

As there can be a limited amount of cash available for investing in the working capital and the fixed assets, it should be properly allocated. The budgeting process will help the management to decide what amount of cash are to be allocated for different sections, which are the sections where the allocation is worth and which are the sections where the allocation are not so much worth for the business.

# Flexibility

The budget system helps you to monitor the performance of your business throughout the year. You can allow necessary changes where you can also increase the spending by taking advantage of the growth opportunities. The budget can help you to know whether you have available funds for increasing the budget of the advertising or not. If your sales are running very slow, you can curtail out some discretionary costs that will help you to stay competitive in the slow periods.

# Profitability Review

With the day to day management activities, it is difficult to record the areas where the company is making more money. A structured budget can help you to identify the areas where the business produces more money. You will clearly understand whether to drop some parts or expand few parts of your business by analyzing the profitability review.

# Assumptions Review

The budget process can help the management to figure out the importance of the business in the industry. The key assumptions of the business can also be determined through the budget depending on the proper business environment. The re evaluation of the business in a regular process can help in altering the decisions in which the business is getting operated by the management.

# Funding Planning

For supporting the operations of the business, a planned budget can help to derive the amount which will be required in the future. The treasurer can plan the funding requirements of the company through the budgeting process.

# Planning Orientation

Starting from the day to day management activities to the long term profits, the entire planning can be structured with the help of the business budget.

Key Points from the Article

From the article we can understand

  • The basic concept and importance of budgeting
  • The benefits of budgeting in the business

The budgeting process can help to expand the capacity of the bottleneck of the business and can help in improving the financial position.

Other tools you might find interesting