If so far it has not become too obvious, perhaps the following reasons will add to the importance of budgeting:
- Many potential funders will require you to provide a budget statement in addition to a business plan, particularly if you are a new business starter
- They help you manage your money
- They help you plan for the future
- They help meet objectives
- Gives you the confidence that your business will make a profit (in some cases)
- They can identify problems before they occur (such as the need for , etc)
- Improves decision making
- Increases Motivation in the Workplace, as they have to meet targets
- Monitors performance (are you capable of meeting targets – recognized from previous budgets)
Who Should Budget?
It is recommended that everyone should budget so that everyone can gain financial control. On doing so, it is important that you take the main responsibility of creating the budget with the help of staff if you feel necessary. If your business has a management hierarchy, it is common for the responsibility of implementing the budget to be passed down to the lower management (supervisors, assistant managers, etc).
When Should I Budget?
Arguably, if you are budgeting on a one-year cycle, you should plan the next budget at least three months prior to the end of the current budget. If you are budgeting for much shorter periods, say, a month, you should begin preparing next months budget within one to two weeks prior to the start date. The timing is very debateable but you should plan your next budget in good time so that your objectives and proposed income and payments are clear for the next budgeted period.
Preparing the Budget
As we said earlier, budgets are made to help meet objectives. For example, are you trying to minimize costs, increase revenue, gain a higher market share (through increased sales), etc. It is therefore important that you identify your objectives so that you can coordinate the budget to help achieve them. After you have identified your objectives and determined the period that you will budget for (1 week, 1 month, 1 year, etc), you will need to gather information to guide you when compiling the budget. This will include past and current performance figures obtained from profit and loss accounts, balance sheets and previous cash flow forecasts. This information can then be used to identify likely sales num bers and costs in the future. Sometimes, it is common for people to compile a budget from fresh ignoring all previous history and current performance: this is known as zero-based budgeting but can be very risky. When preparing the budget, there may be figures that you will feel confident to state (mainly costs), but sales figures can be much harder to predict due to the number of variables that can take affect at any time (in/decrease in demand, level of competition, etc).
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