The Importance of Budgeting

As business owners/managers it will be so important to now ensure you are looking at the preparation of a 2020/21 fiscal year budget and in doing so you would be consolidating the current 2019/20 performance which will then set the scene for going forward.

Budgeting can be a daunting activity however a budget is the most valuable planning and management tool for future success.

Importantly budgeting is a management responsibility not an accounting responsibility and is a planning activity not a computational activity. Budgeting requires the talents that most managers have demonstrated to get their positions in the first place.

Successful budgets are those that are approved, will be the authorization for needed resources and provide managers maximum value toward job performance and satisfaction. It will also protect them from operational surprise outcomes. More importantly a budget must be a document that has ownership by everyone at all levels as a result of their combined inputs.

The new budget will enable you to plan the organisations work for the coming period and how you might meet uncertainty of future variances and factors that determine performance.

It is also critical for a successful budget to be fully supported by researched assumptions which underpin all reasons for its content.

A company board or ownership want to see a budget with support assumptions because they want a prediction of cash flow based on sales growth, expense requirements, and profit. A board always needs to know how growth will be sustainable and associated costs are reduced and/or avoided.

A company budget is built as a consolidation of budgets that match the organisation structure and is owned by each individual operational department. In essence, the budget is a summation of all the budgets which are representative of each direct and indirect activity of operations which make up a profit & loss report.

Measurement of management against financial results should be impossible to conceive the business without a budget.

Most of the work of budgeting revolves around income and more importantly costs associated with generating sales income. A great and effective budget is all about the source and application of funds and their associated costs.

I have always planned budgets to be measured daily against collective and individual KPI’s including job descriptions. I call these the ‘Vital Signs’ of great financial governance and this also establishes a culture where managers and subordinates seek to know how they bare performing against specific departmental, individual and company wide results.

As a good business operator, you would know that growth and development of a business is not always smooth and positive as declines and slowdowns are part of the challenge of successful outcomes.

A good business manager will look to smooth out the highs and lows of the business and eliminate slow ‘off-season’ times through a smart marketing strategy.

Be a smart manager and set yourself apart from others with a disciplined approach to budgeting and management by objectives.

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