A budget is a financial plan which includes a list of all planned expenses and revenues for a certain projected time period. It is a plan for saving, borrowing and spending and gives a business financial direction.
In summary, the purpose of budgeting is to:
1. Provide a forecast of revenues and expenditures to model how the business might perform financially if certain strategies, events and plans are carried out; and
2. Enable the actual financial operation of the business to be measured against the forecast.
Why do we produce budgets
A budget helps in planning operations by forcing you to consider how conditions might change, what steps should be taken now and by encouraging you to consider problems before they arise.
Other functions of a budget include:
- To control activities.
- To communicate plans to stakeholders.
- To motivate others to strive to achieve budget goals.
- To evaluate the performance of the business.
- To have a financial direction that the business can aim towards.
A budget can provide a clear line of sight to your goals and give you the confidence that by delivering on the action plan, the desired outcomes will be achieved.
Alternatively, having no budget can increase anxiety by trying to manage the business in the rear view mirror. With no solid plan to aim towards some small businesses may struggle to foresee the impact that decisions made today will have on future results.
Does your business work towards a budget?