HOW BUDGETING WORKS FOR COMPANIES

• September 30, 2020

It is an approved fact that the critical aspect of managing a company’s performance is planning and allocating needed resources. For that reason, it is important to remember about the budget and budgeting, as the management of financial resources is perhaps the most significant part of running the business. Let’s determine what is budget and what is budgeting.

What are the budget and budgeting?

• According to Brown and Howard- “A budget is a predetermined statement of management policy during a given period which provides a standard for comparison with the results actually achieved”.
• According to H. J. Wheldon- “A budget is thus a standard with which to measure the actual achievements of people, departments, etc”.

These definitions are very different but they can give you a comprehensive meaning of budgets and shape their benefits and other functions.

“The entire process of preparing the budgets is known as budgeting” (J. Batty). The budgeting process provides you information about the directions of allocating financial resources, expected cash flow, revenues, and expenditures for a specific time period.

Let’s take a closer look at benefits and other budgeting functions that serve as an effective tool for forecasting, controlling, motivating, evaluating performance, and facilitating decision making.

What are the main functions of budgeting
Forecasting

One of the benefits that budgeting can give you is forecasting of future events, including sales, company operations, external uncertainties, so you can identify problems before they arise and make confident decisions to prevent them.

Setting Strategic Goals

The budgeting process can be an excellent way for comparing your company’s past and current financial figures and measure your performance which will serve as a base for identifying your strategic goals regarding profit, return on investment, product diversification, or market share. Your budget should include not only high-level goals but also low-level ones to help all managers identify how their performance impact to the accomplishment of corporate goals.

Performance Appraisal

Many experts state that performance appraisal is the main function and benefit of budgeting, as the most accepted measures of performance are profitability, growth (sales, earnings, market share), and value creation (i.e. stock value per share). Thus, it will give you an opportunity to evaluate your and your manager’s performance and discover how well you are performing in meeting targets and main objectives. You will also identify the main “drivers” of your business that have a major impact on your performance, so you can focus on them and make a great use of them.

Conclusion and a piece of advice

Taking into consideration above mentioned functions and benefits of the budgeting you should look at it as an annual “must do” for your company and engage in this process all your managerial staff to prepare a comprehensive financial plan and set an effective control system for measuring the performance and define needed corrective and improvement actions.

It is critical to keep in mind that your budgets should be flexible because none of us is capable of preventing future events and business conditions, so during the year you should periodically revise your budgets and make necessary changes otherwise it will keep you back from your success.