As personal managers of our own life and business managers of our companies, each and every one of us should plan future finances to some degree – Do budgeting.
What is budgeting?
This sort of financial planning when applied to a business organization is the process simply known as budgeting. Planning for the future, both short-term, medium-term and long-term is very important for all businesses.
Therefore, it makes budgeting an important part of successfully managing a business organization – managing its future finance.
What is a budget?
A business budget is a detailed financial plan for a time period in the future. It usually includes a financial plan of expected sales revenue, different types of costs (expenditure) and different types of profit for a business organization.
Often, budgets are also made for a single division or a single department within an organization for a given period of time. Additionally, budgets can also be prepared for other financial metrics such as forecasted Cash Flow – Cash Inflows and Cash Outflows.
Personally, I run my family finance based on two budgets – detailed monthly budgets and the overall annual budget for the year. Inside those two budgets, I track our income from Active Income and Passive Income, our costs such as rent, food and utilities, our family’s total Net Worth (our wealth), and our monthly cash flows. At the beginning of each year, I usually update our annual budget based on the numbers from the last year(s) to make the present numbers as realistic as possible. You can find out the recent updates about how I plan the finance of my family in Monthly Summary: March 2022.
What happens without budgeting?
Without budgeting appropriate plans will not be made. And, without suitable plans, a business will most likely drift away on its own without any real direction or meaningful purpose as stipulated in a Vision Statement and a Mission Statement.
Also, business managers will not be able to allocate scarce resources of the business effectively without a plan that they are supposed to work towards.
Additionally, employees working in an organization that has no plans or targets for future actions are very likely to feel discouraged and demotivated. Because they have no goals to work towards, they will not be praised for achieving their targets.
And finally, if no business objectives are set, then the firm cannot review its progress. It is because there are no set objectives against which actual performance can be benchmarked.
Why are budgets needed?
All budgets should be set in accordance with the aims and objectives of the business.
Budgets are needed when a business organization grows in size, so all expenditure decisions are already decided upon and approved. This prevents the owner or business managers from making all expenditure decisions over and over again. Therefore, this frees up time for the managers because they do not need authorize all items of expenditure every single day.
In addition, budgets allow all scarce resources to be allocated throughout the organization according to the expected level of business activity for a specified period of time (usually one year). It means that the part of the business with more activity will receive more resources. Consequently, less resources will be used in those parts of the business where not much is going on.
Finally, if a budget holder is not operating within the allocated and authorized budget, then corrective measures will surely be taken to improve the current situation.
We shall plan in the short-term perspective such as how much money we are going to earn this month and how much we are going to spend over the weekend.
And, we should also plan in the long-term perspective such as how much money we can earn from doing a certain job in relation to the cost of education and additional training courses required to gain the knowledge, skills and formal qualifications.
