Benefits of business budgeting

Who doesn’t want to become a businessman? Most people would love to start some business venture in their lives, something they like, something that is close to their hearts or something they have specialized in. But a majority are not able to fulfill their dreams because they don’t have the financial resources, or are happy with their current jobs and don’t want to take risks. If you are planning to become an entrepreneur, this article is for you, and also for those who have already started some business because we are discussing a key aspect of business planning here –budgeting. Lack of proper budgeting can lead to disastrous consequences for a business.     

Budget and budgeting are common words. Every year, we hear about governments announcing annual budgets, which means earmarking money for various projects and developmental activities, and the balancing of revenue and expenses. We have surplus budgets, deficit budgets, and balanced budgets. Businesses too have budgets, and budgeting needs to be done with great care and precision to avoid losses and trouble.

But many people aren’t aware of the importance of budgeting. Normally, a person starting a new venture will have a certain capital, which he will spend haphazardly, or, even if he plans his spending, it will not be done meticulously. Major expenses will be planned, leaving the minor ones. But too many minor expenses will become a major expense at the end of the month and this can lead to financial sickness. Budgeting means balancing of both revenue and expenses.

Developing an accurate budget is a critical component of financial success. It means detailed and meticulous planning of expenses taking into consideration even the smallest expense. It also means keeping provisions for unexpected expenses coming from emergency situations. Expenses must be planned in proportion to the income. This is an issue of sound financial management.

Benefits of budgeting   

The biggest benefit of accurate budgeting is that it guarantees financial health of your company. Just a look at the company accounts will tell you where you are financially – in profit, in loss or in-between etc. This allows for strategic and long-term planning for everything from current operating costs to potential expansion. Other benefits include the ability to attract investors; the ability to set new sales goals; the ability to avail of loans and the ability to make decisions about salaries, bonuses, benefits and overhead operating expenses.

Proper budgeting gives you peace of mind. You know the exact amount you are going to spend on fixed expenses. You know the rent, the salaries of your staff, the insurance costs, and other administrative expenses. If you plan all these at the beginning of the year, you can devote your time for marketing to obtain the desired profit.

Objectives of budgeting

Like the benefits, there are also specific objectives of budgeting. First is the allocation of resources. Running a business requires a certain amount of capital and this amount is invested in various sections, like equipment, operation costs, inventory etc. A budget details the inflows and outflows of cash during the year. By studying the cash flow, you can find out where the operations are going wrong and where they are going strong, and then make the necessary adjustments.

The second objective is business coordination. You can set sales targets for each department with a specific budget. The department will know how much they have to sell, and how much money they have for promotions and incentives etc. The third is performance evaluations. After a specific period, all departments can analyse where they stand and whether they have met their targets. You can compare the actual results with the costs you have incurred. If performance is not satisfactory, problems can be identified and corrective measures taken.

Budgeting can be done by the company management, or if they want, they can hire an outside accountant or a business manager who has expertise in business finance. The hired accountant or agency can help establish an accounting system, track expenditures and submit reports that help business owners to make intelligent and informed decisions about their business operations.

Trial and error process

 

Budgeting is generally called a trial-and-error process because, however hard you try, it’s difficult to estimate your expenses and income accurately because they will keep fluctuating. But this will also show you the way forward. For example, if you overspend on staff recruitment in a month, you can cut expenses in some other areas, and if the revenue is less, you can adjust your expenditure accordingly. For the system to work efficiently, you must get your priorities right. There are expenses which can be avoided or postponed, while the most urgent expenses need to be addressed first.

Every business will have a list of obligations and expenditures it must meet compulsorily. These include: Monthly rent, Utilities charges, Loans or lines of credit, Staff salaries, Insurance, Purchase obligations, IT services, Professional services, Advertising, etc.

Any failure to meet these obligations will result in the closure of business. Being unable to pay salaries means employees will leave the company and you will get into legal trouble; failure to pay rent means eviction, and failure to pay utilities bills means disconnection of services. It’s a fact that several companies get into this sort of trouble. Their salaries are delayed. Rents are not paid and other obligations are not met.

There could be several reasons for a company encountering such problems, but poor budgeting could be one of them. If the owners had enough foresight when the losses first started, they would have planned their budget properly, and the losses could have been minimised, if not fully avoided.

Some people fail in their budget planning because they fail to get a complete picture of what they are doing. When you start a business, you must have an idea how it should perform. For example, you might set a profit target of 100,000 riyals. But did you calculate accurately the total sales required for this profit? Many fails in their calculation because there are so many unexpected expenditures. Did you add the utilities costs to the expenses? Or the possibility of unexpected repairs to your vehicles? Also, do you have options if the sales fail to meet the target?

There is a misconception that budgeting is necessary only for big companies. In fact, it is equally important for all businesses, especially for those who operate on a shoestring budget. There are owners who don’t know where their money is coming from and where it is going, and when income is falling, they can’t analyse why it is falling. Since even a little difference in cost projections and earnings can have a devastating effect on a small operation, proper budgeting is crucial for the survival of such businesses.

A budget gives a proper framework and financial structure for a company to reach its desired objective. It guides the company throughout the year and gives the employees an idea about the financial policies of the company.

There is a growing awareness among businesses about the need for accurate budgeting. In a complicated and complex market where competition is intense, only those who adopt the latest business practices and adapt to the changes will succeed. This is a general truth, whether you are doing business in Qatar, India or Germany.

CA. Abdul Khader MT

(Author is a Chartered Accountant)