End of the year and have you not defined the budget for the following year? Do we financially plan the operation of the company? Do we promote financial liquidity in our operation?
Budgeting helps you identify your income and expenses in a given period. The most common is that they are carried out biweekly or monthly, according to the periodicity in which you receive your income and involve the whole family/business.
Goals of making a budget
- Know the initial and total investment that must be incurred for the execution of a project.
- Determine the sources of financing from which the investment required for the project will be obtained.
- Define the payback time for the investment.
- Estimate the gain and establish the viability of the project, taking into consideration the chance value of the investment.
- Determine the life cycle of the project.
Among the benefits you get from organizing your accounts are:
- Know how much money is received.
- Know how a lot of and wherever the cash is being spent.
- Adjust expenses according to income.
- Set savings goals to achieve dreams.
- Better prepare for emergencies.
How to adjust a budget?
Juan must take actions to adjust his expenses to his income, which will result in a better quality of life. The first tip for our protagonist is to analyze variable expenses such as packages, gum, soda, among others. Now, you should also think about what you will do with your extra income from month three, although it is tempting to spend it on a trip, with your friends, change your cell phone for a more modern one, the best option would be to pay it to the motorcycle credit, a very wise decision because the loan payment will decrease and in the long run you will pay less interest for the borrowed money.
If when making your budget you find that you spend more than what you receive, you will have to adjust your spending patterns to reach your financial balance; On the contrary, if your income exceeds expenses, you can increase the amount allocated for savings and thus reach your goals faster.
So why are budgets useful?
- They reduce the risk of defaulting on financial obligations and allow you to recognize your priorities.
- They show the fact of your Financial Situation of affairs and permit you to create changes once necessary, before creating mistakes or neglecting your financial Situation.
- They allow you to make monthly comparisons of your consumption and therefore determine which expenses you can adjust.
- They function as an evaluator of the management of your resources, assist you to recognize your current money standing, and permit you to require a charge of your economy.
- Provides control over your finances. Planning of company revenues and costs
- It allows detecting errors in the operation of the company in advance
- Review company policies to achieve the planned objectives in case we realize that we do not meet them
- Helps to monitor business activity to see if everything is working as normal
- It favors the analysis for the optimization of the company’s resources and to achieve the greatest efficiency
It is important that the budget is always updated with the expenses that are made daily, as advice you can take it with you on your mobile device or have it physically; this way you will not forget to check what you have consumed and will be alert to any unusual situation with your money.
From a business point of view, efficient management is based on three essential aspects:
• Set objectives and plan resources, activities, strategies so that you can anticipate events and thereby reduce uncertainty and face changes.
• Coordinate in a guided way the strategies and actions to follow, allowing you to integrate all areas of the company with each other as well as with the objectives of the company.
• Control and compare the results obtained to know in which areas or activities there are deviations or variations.
The simplest way to achieve this is through a budget since without it the
organization is like a ship adrift in which it would have to be improvising before the different circumstances that will arise. The main idea of this practice is to be more than a set of numerical items, that is, a plan that includes strategies, policies, and actions to follow.
What is the financial budget?
It is an integrating plan to plan the execution and administration of the financial resources that the company has according to the operations planned in a determined period to achieve the objectives stipulated by the Management.
The financial budget is a strategic management tool through which the administrative control of the company is sought, in which forecasts and projections of different elements of the business are made. For this reason, when a company has a well-defined financial budget, it will have a better chance of achieving its objectives and obtaining competitive advantages in an increasingly demanding market.
It is important to mention that the financial budget deals with the structure in this area of the company, that is, how the relationship between assets, liabilities, and capital is composed, being able to summarize its purpose in two fundamental objectives:
• Monitor and seek greater liquidity.
• Monitor and seek greater profitability.
Budgets are usually related exclusively to the income statement, however, it is important that you also include the balance sheet. This practice will allow you to consider the cash flow you need to carry out the operation, not only about expenses and income. For example, if you are considering introducing a new product, you should consider the impact that the purchase of raw material for its production would have on cash flow.
By budgeting solely based on the income statement, you will not have the ability to analyze capital expenditures that can also affect your financial outlook, such as the acquisition of a fixed asset. By also taking into account the balance sheet and cash flow, you can budget for the collections that will be made, the debt payments, the materials for manufacturing the products, the volume of production, among others.
Benefits of making a proposition for your company
A budget is a fundamental tool in business management through which it is sought to consolidate the operations of the company with the administration of existing resources through individual and group efforts to achieve the objectives and generate improvements in the organization, this practice has benefits and consequences that go beyond the financial dimension as it involves all business management in general.
Some of the advantages of budgeting are:
1. Provides management with a comprehensive view of operations and results, allowing them to make informed and timely decisions.
2. Translates the objectives of the company into actions by specifying the resources, income, and activities required to carry out the strategic plan for the budgeted year.
3. It is a useful tool to measure the efficiency of the middle managers in charge by granting them both operational and financial responsibility.
4. Facilitates administrative control and requires periodic evaluations of business management.
5. It fosters a correct structure determining the responsibility and authority of each one of the members of the organization.
6. Help with the financial management of the company.
7. Commits to maintaining an archive of controllable historical data.
8. It allows us to know in advance the surplus or shortage of funds and detect when it is convenient to resort to obtaining loans.
9. It is an ideal tool for controlling the cash position.
10. Motivates planning and timely monitoring of the company’s situation.
11. Having the cash flow to achieve the objectives and the goal will promote the sustained growth of the company. Not only is it enough to dream of an Action Plan, but you also have to make it come true.
A procedure that you should not forget to carry out is to periodically compare the results against the budget since this will allow you to add value to the business through better planning, monitoring, evaluation, and control. For example, if in your reviews you detect that the per diem expense is exceeding the budget, you can review the policies on time and not wait for it to be a cost that may cause you to lack cash for another item.
While we have discussed the advantages of budgeting, there are a few disadvantages too, these are listed as follows:
Disadvantages of budgets
However, not all benefits. Budgets also have a series of limitations such as:
- By relying on projections and estimates, we run the risk of relying on data that may not be correct
- Sometimes unforeseen events that may arise are not taken into account
- It takes time for its realization and implementation if you want to be completely reliable
Note: We must not ignore that budgets must be constantly adapting and updating, or we could fall into the danger of throwing away all the work done.
The budget is a guide, a strategic plan through which you can detect and correct past mistakes, where to plan new investments or innovation actions. The basis of the budget is that you have the correct information and in real-time to make the appropriate decisions.
Aniket Chatterjee is a Digital Marketing professional with experience of more than 3+ years in this field and is well versed with SEO, SMM Google Ads, Bing Ads. He is currently working with eBetterBooks, Best online accounting and bookkeeping services company helping many other small businesses and entrepreneurs. His keen interest in the field of writing for finance and marketing developed when he was in high school and has been publishing content since then.