Plan - Budgeting

What is a Budget?
A budget is a plan to:

  1. Ensure you have enough money for activities in the future.
  2. To control and monitor all the finances of the business, including its income and expenses.
  3. To enable information to be extracted so the business can make decisions as to direction and growth.

The budget enables the owner of the business to rely on accurate figures that would otherwise have been based around guesswork alone. At any time, the owner should not confuse a budget with a forecast.

A Budget is not a Forecast
A forecast is a prediction of the future, whereas a budget is a planned outcome of the future that the business wants to achieve.

A budget is basically the plan of your business shown in money terms because it estimates your sales, purchases and your other business expenses, including drawings you take for yourself for the next 12 months. It is designed to force you to work as close to your budget as possible, so that if unexpected costs arise, then the budget can be adjusted or amended if that happens. It indicates where your money will be going and how this money will be raised, with the main objective of course to ensure that the business income is greater than its expenses and therefore results in a profit.

In general, the budget is prepared to coincide with the financial year of the business, but budgets can be split monthly or quarterly, so a closer monitoring of the operation of the business is possible.

What is Business Budgeting?
Most of us do not really think much about it, but we are preparing a budget every time we estimate how much cash we are going to need for a particular purchase and how much money we will have left over at the end of the month after paying our bills.

A budget is simply an estimate of what is going to happen in the future as far as our income and our expenditure is concerned.

Business Budgeting is a term often used to mean forward planning in a business. It has, of course, a wider meaning than planning because it also includes coordinating, managing and controlling. In simple language, a business budget is the financial plan of a future period in your business and represents a suggested way or plan of achieving a particular result. It is a means of expressing the goals of your business in financial and monetary terms.

In a wider sense, a budget is really an estimate of the future performance of your business which encompasses the income you will receive, the expenditure that you expect to pay, the profitability that will result and the information generated to measure the ongoing operation of the business against this predetermined plan. It acts as a means of comparing the actual performance of your business with that set down as a desired plan for achieving a particular position of profitability, taking into account all the other factors such as income, expenses, etc.

Business Budgets is a Financial Business Plan
The process of creating a budget should be simple if there are appropriate systems in place to extract accurate information. A budget is organised in the same way and format as a financial statement such as a revenue statement, or profit and loss, and usually covers a one year or 12 month period. At the end of that year, the estimated results of income and expenses as put down in the budget are compared to the actual performance of the business, as recorded in the financial statements.

Budgeting, therefore, expresses the business plans of a business in financial language. It is not designed to take over the role of management, but to assist the management of the business so they can use the budget as a gauging tool along the way and to roughly measure how they are performing, against the plan they set down at the beginning of the year.

Many small business owners manage their affairs in a relaxed manner and usually operate without the need of any type of budgeting. However, the bigger the business becomes, the more important the need for budgeting to be put in place and proper management techniques to be applied on a day-to-day basis.