Let’s state the obvious, budgeting isn’t sexy, nor is it fun. It’s an ongoing process, and companies need to do it on an annual basis. If you’ve ever stopped to ask yourself, why am I doing this budget report, then this article is for you…
1. “Because we have to”
So this may sound like a smart-alecky answer, but from an organization point of view, “because we have to” does carry some validity. Maybe you have industry or government regulatory reporting requirements and have to report back certain specific pieces of information in order to stay certified. Maybe you have certain covenants with your bank or lending institution that require you to provide future forecasts to keep lines of credit available. And maybe you have ownership or a board of directors that are not involved on a day-to-day basis but need specific information to make decisions about the future of the organization.
2. For financial predictability
In life, some surprises are good and some surprises are bad. Surprise birthday parties are generally good, surprise trips to the emergency room are generally bad. If you are a publically traded company, investors see hitting your earnings per share estimate as good and missing your earnings per share estimate as bad. However, without some sort of planning process, financial predictability is impossible.
3. To understand business drivers
Running a business successfully requires more than knowing just the top line numbers. You might know instinctively that sales are going to be roughly $1,000,000 per month based on past trends. But to make that million each month what needs to happen? How many employees will you need? What happens if your new labor contract increases wages by 3%? How many tons of raw materials will you need? What happens if your cost of shipping doubles? What is your overhead? And when all those come together in the end will you actually make a profit or do you need to approach things differently? These are all questions that can be answered with a proper financial budgeting process.
4. To manage people’s performance
How do you hold people accountable for performance without something to compare them to? In most organizations you are going to compare people’s actual performance to a targeted performance. Those target numbers need to come from somewhere and most often those targets come directly from or are facilitated by the budget process.
We hope these financial budgeting tips help you to gain control of your expenses.
The Million dollar question. Are you ready?
Now take a minute and ask yourself why your organization budgets and what you hope to accomplish by budgeting. That answer should then be the foundation of your entire budgeting process. However, if you can’t answer the question, then all you are doing by budgeting is wasting time and wasting money.
Now that you know why you’re budgeting, find out how, download Best Practices for Planning, Budgeting and Forecasting.