There are many advantages to using budgets. They:
- provide a method of allocating and using resources within the organisation
- help to monitor and control operations
- promote forward thinking
- show employees an overall picture of the direction of the organisation which can motivate staff
- help to co-ordinate different departments and align them towards shared objectives
- provide a framework for delegation.
Most importantly, budgets are an early warning system. They highlight where investigation and appropriate corrective action is necessary.
However – these benefits do not come problem-free:
- Staff time devoted to budgets carries a real opportunity cost. The time workers give to the budgeting process means they are not available to carry out other responsibilities.
- Errors and inaccuracies will always remain since it is impossible to predict the future. Major external events such as rising energy prices or the global recession may distort the whole process.
- Budgets involve and affect people, they may cause conflict. There may be difficult choices over where limited funds are spent. Some departments with tight budgets could feel constrained. This carries the risk of frustrating initiative and enterprise.
Overall – many organisations feel the advantages far outweigh the disadvantages and this early warning system enables them to keep on top of their expenditure in time in order to stay profitable.
There are four key steps to developing a business budget –
Step 1: Identify Your Goals
The first step of creating a budget is identifying your goals for your business. Much like the information you would include in a business plan, you will need to think through what you want to accomplish with your business, i.e. how much you want to make.
Step 2: Review What You Have
Take time to review documents from your business as it is today, including your profit and loss account or income statement, your balance sheet, outstanding debts, past tax returns, assets, liabilities and a projection of immediate cash flow. And don’t forget to pull out any current budgets you use for your business, as they can serve as a starting point for your new budget.
Step 3: Define the Costs
What are the specific costs associated with each of your goals identified in Step 1? This is where you would break down each goal into an annual tangible amount of money, and then break it down by month. Use past data from your business to fill in all of the costs, and do some research to generate approximations for each item you do not know the cost for.
Step 4: Create the Budget
Taking the information you have from Step 2 and Step 3, develop a spreadsheet. One way to do this is by working backwards from the bottom line and seeing where you end up. Keep in mind that you may need to make some adjustments as you develop your budget.
Your budget should be a tool you use daily in your business, not a document you create and then forget. By using a working budget, you will become more accurate over time and be able to make good decisions about your business and any new ventures you’re considering.