Budgeting – An overview

  • Budgeting is a control mechanism to control and monitor your firm’s actions. Budgeting ensures you aware of all the aspects of your business and allows you to focus on those aspects which is performing inefficiently. In the absence of budgeting, you are operating in an environment of no control and monitoring mechanism which will lead to unnecessary expenses, over spending on certain areas, lack of financial clarity as to how much fund is required.Decoding-the-Indian-Budget-2018-for-UK-businesses
  • In uncertain situations, budget also helps in fine tuning sales since when you have already budgeted the expenses and you are aware of your desired profit, you can reverse work it to get the required sales. Effective sales targets can be set using budgeting by bottom up method as said above when there is an uncertainty regarding the sales that can be achieved. This is another benefit you get out of budgeting apart from cost reduction and cost control.
  • Contingent events occur in the business all the time and in the absence of budgeting, you may not be able to meet the requirements of a contingent expense immediately. Budgeting not only gives a clear picture of expenses, but also shows your normal financial requirements, therefore you are aware of your current financial requirements and you will be in a better position to forecast any additional finance requirement due to contingent event.
  • Budgeting involves extensive collection and analysis of data and will take a considerable amount of time and requires the involvement of management persons in introduction stage and in consistently following up with the budget and in implementing a monitoring mechanism. So the timing of profitability or expense budget should begin well before the beginning of the financial year say Jan or Feb of previous financial year, so the budget can be prepared and effectively monitored from the beginning of the next financial year.
  • Budgeting need not only be restricted to expense and income budget. It can be extended to many areas such as cash flow budgeting in order to manage your liquidity position properly, capital budgeting can be done to determine the feasibility and capital required for a budget, cost budgeting can be done to determine the price of a product.
  • For startups, the initial capital is very important in scaling the business and with proper budgeting, they will be able to minimize the cash burn and effectively use their capital. For existing businesses, who is finding it hard to control their expenses or achieve profitability, budgeting exercise will throw light on their expenses and revenue and profitability can be forecasted, thus enabling the organization to work towards that.
  • In summary, Budget is an estimation of revenues and expenses over a specified future period of time which needs to be compiled and re-evaluated on a periodic basis based on the needs of the organization. It also involves timely comparison with the actual performance for finding out variances and taking corrective action.
  • Key takeaway from budget is
    • The organization becomes more structured.
    • Employee involvement in decision making will increase due to participation in budgeting process.
    • Employees and Management in particular will be in a better position to make informed decisions.

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