THE VALUE OF BUDGETING & FORCASTING

Enables more effective money management.
Better allocation of appropriate resources to projects.
Improved performance tracking.
More likely to meet your objectives.
Plan for the future: set targets for the business as a whole, plus for the different departments or functionality e.g. sales, operations, production, funding, logistics, HR…
More informed decision-making e.g. about salaries, bonuses, benefits, overheads and operating expenses.
Problems identified before they occur – e.g. the need to raise money, get funding, address cash flow difficulties and create a cushion for unexpected expenses.
Increased staff motivation.
Greater potential to attract investors.
Easier tax preparation.
Open lines of credit, if required.
If you need to answer to a board of directors or an advisory committee, a detailed budgeting process will enable you to provide regular earning reports and status updates.

If unanticipated costs exceed projected earnings, appropriate changes can be made because they will be noticed sooner.

Forecasts serve as input for preparing budgets that help management develop the company’s long-term strategic plan.

Budgets compel planning.
Budgets provide a basis for control.
Budgets improve communication.
Budgets improve coordination.
Budgeting quantifies the strategic execution plan, then provides the capability to examine the viability of the plan by evaluating the actual performance – comparing actuals to targets.

The most common consequences of not budgeting include out of control spending, a lack of savings, less financial security, unable to pay bills at the end of the month, a higher likelihood of going into debt, way more stress, and worst-case scenario, going out of business/ bankrupt.

Inaccuracy is based on inaccurate data, assumptions or misinterpretations.
Rigid decision making if financial outcomes are the only basis for consideration.
Gaming the system can, and usually does, backfire.
Expense allocations only for known expenses.
Spend it or lose it (misguided attempt to ensure you receive the next term’s budget).

Budgets are only as useful as you make them.

If your information is inaccurate, your budget will be wrong. The larger a business becomes, the more challenging it is to pull in the right information, especially if there is no enterprise-wide system or software.
Poorly organized environments require many iterations of the budget.
Budgeting takes time, and time is money. It can be very time-consuming to create and keep tabs on budgets.
You don’t have the right tools. Traditional budgeting processes take too long and consume too many management resources.
Blamed for negative outcomes. If a department does not achieve its budgeted results, the department manager may blame other departments that provide services, information, resources…
Budgeting puts a cap on spending and restricts thinking in a big way. Budgeting can cripple creativity, curb risk-taking and lead to problems if the market shifts in a different direction sometime during the budget year and the business strategy and budgets are not adjusted accordingly.

Master Budget that includes all the functions, i.e. the whole enterprise budget.
Operating Budget.
Financial Budget.
Cash Flow budget.
Production Budget.
Equipment, machinery, acquisition budget.
Personnel Budget.
Marketing Budget.
Sales Budget.
Overheads Budget.
New Projects Budget.
Research and Development Budget.

There are many different methods of budgeting. Here are some of the most used:

Zero-based budget – every cent of your monthly income is used and accounted for.
50/30/20 budget – spend 50% after-tax pay on needs, 30% on wants, 20% paying off debt or saving.
Envelope budget – put away money for known, expected expenses.
Priority-based budget – do/ pay most important first.
“Pay yourself first” budget – speaks for itself.

A budget is a financial statement of expected revenues that a business wants to achieve for a specific future period. Budgets are prepared by management before the budget period starts.

Budgets may be adjusted to manage the company’s operations better; improve efficiency, productivity, cut costs, determine the expected financial position and its debt requirements.

A solid budget serves as a road map for a business owners to ensure they are on track to meet their goals as they navigate through each month, quarter and year. Budgets need not be complex to be effective.

A simple estimate of monthly revenue and expenses for a smaller business can be as efficient as fully integrated management financial reports that include a profit and loss, balance sheet and cash flow statement.

The main point is to establish benchmarks for the various budgets and then stick to them e.g. definitive sales and spending targets to achieve your business strategy.

To ensure budgeting is done accurately, it may be worthwhile to hire someone to do it in-house, or an outside accountant or business manager, who has expertise in business finance to establish an accounting system, track expenditures and produce reports that enable business owners to make calculated and informed decisions about business operations.

Need a hand to create accurate budgets or forecasts?
Need the right reports set up for your business?
Wish you could eliminate your bookkeeping, accounting, payroll and/ or finance function from the list of things to worry about?
Need an integrated business intelligence system to ensure accuracy of accounting source data?
Consider: Outsourcing your financial accounting function