Companies that have experienced success over the years were due to proper planning and strategic implementation of those plans. One essential aspect of planning that should not be overlooked is budgeting. So, as the planning process is ongoing, don’t end it without incorporating budgeting. To budget, you must keep a few things in mind, like the company’s financial data and plans. In this article, we will be looking at how budgeting works for companies and its importance to company finances.
What Is Budgeting?
Budgeting allows an organization to plan, monitor, and manage its expenses. Making budget plans begins with revisiting previous budgets before going ahead to make plans for the new ones. The budgeting process involves mapping out the financial needs of a company and planning the amounts spent on the company’s activities.
Anticipated Revenue and Estimated Expenditure
To know how budgeting helps companies, first consider the revenue and expenditure. The total cash the company should make during that period is called the Anticipated revenue. At the same time, Estimated Expenditure refers to the cash outflow. It is all the expenses the company should make at that given period.
The anticipated revenue and the estimated expenditure can be done in two ways, the top-down approach and the bottom-up approach. The top-down approach involves the top management team preparing all the company’s income and revenue. After the review is done, it is passed down for implementation. In the Bottom-top approach, the managers prepare all the departments’ financial reports and pass them up to the top management team for approval.
Steps To Prepare Budget For A Company
Before budgets are made, there are five things to consider, which would help to know where the company is headed financially and understand how budgeting helps companies.
1. Analyze the Profit and Loss Statements
The first step a company will take is to review the previous financial statements to see how they have performed. The company takes out any unnecessary cost they don’t wish to incur at that time. Also, look for how prices have increased over time and adjust prices if inflation occurs. As forecasts are being made, there should also be room for adjustments in case sales or expenditures increase.
2. Make an Estimate for Expenditure
After determining income and expenditure, analyze the expenditure to determine what you will be spending cash on. Some fixed expenses, like rent, payment for services, insurance, etc., should be re-evaluated to see if the company can get them cheaper to save costs. Salaries should also be reviewed if the company hires new staff.
3. Make an Estimate for Capital Expenditures
Capital expenditures should be considered in a budget. For example, if the company hires new employees, the cost of purchasing the tools they would work with is considered. Not thinking there will be a need to acquire more working tools will affect the quality of work and slows down productivity which is not bad for business.
4. Prepare the Cash Flow Statement
When creating a budget, cash flow income should be documented. A statement of the company’s cash should be ready so that in it can be referred back to in the event the company wants to make a purchase. The cash flow statement will determine if the company has the cash to make such a purchase at the said time.
5. Examine the Budget
Calculate the monthly revenues and expenses incurred by looking at the whole budget for the entire period. To check if the company is keeping to its budget, compare its financial statement to its budget. That would tell if the company is financially disciplined
Importance Of Budgeting For Companies
For any business to experience substantial growth, budgeting is a must process that has many positive impacts on business growth. Here are several ways how budgeting helps companies:
1. Used in Planning
When planning for company operations, budgeting helps to prepare for unforeseen circumstances. While making plans for the company, some things might not go as planned. The process of budgeting helps managers to fix an alternative method in case things don’t go as planned.
2. Boosts Cooperation in the Company
Budgeting creates a link-up between all the members of the organization. The management team creates a healthy working relationship with other operations members to know how they are holding up in their various departments, including how they will all work together for the company’s success.
3. Fosters Communications
Intimating all the plans to the various managers is an essential part of budgeting. The managers relay the programs to every team member, so everyone understands what the company needs and how to support it. It gives room for people to voice out their suggestions, ideas, and initiatives that could help to move the company higher.
4. Fuels Determination in Everyone
When a budget is set, everyone is expected to work to ensure it is successful. The managers are more determined and challenged in the budgeting plans likewise every other worker. Everyone is placed on a target in which they will be rewarded according to their contribution to the budget.
5. Monitor Financial Activities
Proper budgeting allows managers to manage the finances of the company better. This is because they will use the financial budget for the year to monitor and regulate financial activities.
6. Reviews the Performance Level of Managers
Budgeting puts a check on the performance of managers. It’s a way of evaluating their work and knowing if the targets set in the budget are met.
Creating a budget for a company can take a lot of time, so it’s better to start early enough. To budget, you must consider companies income and expenditures, amongst others. Budgeting is essential for any company that wants a healthy financial life. So, knowing how budgeting helps companies, as written in this article, will make your work easy as you maintain a balanced financial life.