We are often asked – why should I do budgeting? Budgeting is something that only big companies need, while small companies only have few transactions, and everything is clear even without a budget. But, is this so?
Why should a company have a budget?
Most of the people know that budget is a plan for future, however benefits of budgeting far exceed those of a simple forecast. We can tell from our own experience that budgeting has three crucial advantages:
Budgeting helps the management to clear their thoughts and express ideas in the form of a
plan
While carrying out his/her duties, a lot of ideas may come to the mind of a company’s director (manager) on what he/she could do in the future, how he/she can improve company product/service and increase profitability. For example, manager might think that it would be a great idea to form quality control department in order to improve product of service. Or he/she may think that it would be a good idea to stimulate sales through digital marketing. Budgeting is a tool for transforming these ideas in specific plans. Namely, during the budgeting process, manager is planning future revenues and expenses. Detailed budgeting of expenses pushes managers to transform one or more ideas that he/she has to a specific plan and input them in the budget. For example, manager could allocate funds for digital marketing in the budget and input the amount as a planned expense. Manager could also estimate salary expenses needed to form and run a quality control department and could input such expenses in the budget. If it turns out that forecasted revenues are insufficient to implement all the ideas that came to the manager’s mind, or in case of implementing all of them would lead to sub-optimal profits, then manager will be forced to prioritize the ideas and implement only those ones that he/she believes are more important. Therefore, it can be concluded that budgeting helps managers to organize their ideas, transform them in specific plans and prioritize implementation timeline for ideas based on their relative importance.
Budgeting pushes managers to act
As noted above, company’s manager may come up with number of ideas regarding business development and related projects. However, often these ideas are never acted on. It is common knowledge that reflecting specific idea in a budget and translating the idea in specific numbers ultimately aids implementation of the idea, which aids company’s development and growth process. Besides, budgeting helps managers to forecast possible difficulties and plan respective measures to cope with those difficulties.
Budgeting helps to better understand and digest the company’s existing financial and non-financial position
During the budgeting process, in order to forecast the future, management is forced to dive deep into the company’s specific nuances and translate those nuances in specific numbers. During this process, management better acknowledges the existing resources, past experiences and most importantly, those key factors (so called “drivers”) that cause the company’s financial performance. As a result, management develops a better sense of existing circumstances and this aids more informed decision making in the future.
Conclusion
Budgeting is not a theoretical process with nominal value. Instead budgeting brings significant practical value to both large and small companies. Budgeting helps to organize thoughts, make better sense of company’s existing circumstances and pushes management to act.
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