The Importance of Budgeting

With the new fiscal period upon us it is critically important, no matter what size the business, that you ensure budgets are in place.

Budgeting is often a daunting process and even approached in some businesses with a strange combination of disinterest and trepidation. However, based on history and experience, providing your financials are current, budgets are an essential management tool to guide us through the challenges of profit performance.

Budgets are not an irrational exercise as some managers may consider. There has been many instances where I have heard business owners say, ‘If I still have money in the bank after expenses against income, I must be doing OK’

What a sad philosophy to live by. Budgeting has the potential for being a managers most valuable planning and management tool. In these days of heavy competition and market volatility, companies and managers need all the tools possible if they are going to succeed. They simply cannot afford to let budgeting remain a dull and boring exercise.

I believe that budgeting is a management responsibility and not accounting. It is a planning activity and not a computer exercise. In reality, budgeting does not require some special form of logic. It requires the talents and expertise that most managers have demonstrated to get their jobs in the first place. It also requires sound business activity knowledge accompanied by pertinent principles, bench-marking and rational financial techniques.

successful budgets are those that will be approved, with no ‘Blue Sky’ assumptions, will underpin the needed resources, provide management with maximum value toward job performance, and protect the business from adverse surprises.

Budgeting is a necessary activity and one that is required of effective managers. Budget variances, be they positive and/or negative point up an ability to respond the corrective actions immediately and not at the end of each month.

Budgets are numerical plans for the next fiscal period and is the only instrument that can bring reality to objectives, strategies, priorities, and forward plans. Similarly, goals and objectives take on effective meaning when reflected in the budget but have no meaning when not reflected.

Budgets are also a tool to measure accountability and responsibility of management effectiveness. Managers will be measured against their budgets.

Poor budgeting damages a business credibility which is an important asset for any manager.

The best weapon a manager can have for a new and volatile new fiscal period are good plans and forecasts, with board approval. After all, the key stakeholders of any business wish to see a best practice return on their collective investments.

The bottom line results will determine the future of managers and/or management.

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