Effective and efficient budget management is a cornerstone of an effective and profitable organization operation. Proper budget management is crucial to the budget planning process, drawn up by the company’s long and short-term financial objectives. The whole process should be aligned with the company’s short-term goals, objectives and plans, and the company’s long-term business strategy. While most people are familiar with the process of budget management in regards to their own household budgets, many people are less familiar with it when it comes to their own businesses. This short primer should clarify the basics of how to properly conduct a budget.
Why Are Budgets Important?
A good budget management process begins with the determination of both the funding and the operational goals. The funding objective will be the funding required to conduct business activities. This could be anything from conducting research to building and maintaining websites. Ideally, the end result of any project would be a return on investment (ROI) that covers the costs of all of its planned activities, including marketing, operations and maintenance. Thus, all of the expenses associated with running and maintaining any business should be included in the budgeting cycle.
The operational goals are the results achieved by the budget management process. These could be company growth goals or specific project goals such as opening a new store. Companies usually set goals for the year, then conduct a series of long-term planning sessions to determine what, if anything, needs to be done to achieve those long-term strategic plan targets. Once all of these activities have been determined, companies can begin the budget management process.
A key feature of budget management that makes it particularly effective is its ability to provide accurate and timely financial information. By tracking budgeted and unplanned expenses over time, budget information is available at the click of a mouse. Budgets can be viewed in real-time and can be reorganized and reviewed for any necessary adjustments. Even when budgets do not change as much as they should, being able to see them in real-time can help make budgeting easier and more efficient in the future. Therefore, the sooner a company gets started with budget management, the sooner it will realize its benefits and begin to experience sustainable, profitable increases in its profit margins.
Another important feature of budget management is that it allows for a flexible and progressive allocation of resources. As budgets change and are adjusted in response to current market conditions, businesses remain financially responsible by only spending what is necessary to conduct a particular project. With budgets, there is no room for discretionary spending because budgets ensure that only the necessities are met and nothing extra is required.
The flexibility associated with budgets is another significant advantage of using budget management. As budgets change and become out of sync, businesses are not subject to sudden and drastic changes in their bottom line. Budgeting is real-time information and is therefore infinitely adjustable. Businesses are not required to reallocate their budgets, adjust their goals, or make contingency plans when they experience an unexpected rise in expenses. Budgeting is therefore an easy process and can be conducted on a monthly basis, quarterly, or even annually, making it the perfect solution for a business in transition.