The article talks about the importance of formulating a budget for businesses even small-size companies since it establishes their goals and helps to predict the success of a business idea while embarking upon the financial health of the company. Formulating a working budget is important from a business and financial perspective that allows measuring progress, accounting for unexpected expenses and availing investment opportunities. It is a tool for attracting investors and getting loans.
Budget enables both the insiders and outsiders to look at the history of performance and upcoming plans and deliverables of the company. Small companies usually don’t pay much attention to budget since they consider financing as secondary to the product or service they provide as well as a waste of time. A simple and effective budget is the need of time for small companies. Alexander defined budget as a tool for identifying incomes and expenditures. The projections allow a company to compare it plans and expectations with what happens actually thus showing the company’s performance and accomplishment of the goals.
Budget entails with it three financial statements of which cash flow is the most important followed by income statement and balance sheet. The realistic projections about a business future performance can be made through historical data as well as likely income to be generated through marketing programs, seasonal businesses and other anticipated sources with the help of research. Fixed and variable costs should be projected in the same manner and later the numbers should be plugged in.
The key is to be conservative and build contingency plans in order to build a financial cushion in the budget(Klein, K. E. 2006). The biggest mistake to avoid is that budget should be treated as an ongoing exercise rather than once a year exercise done to accomplish some purpose which is not consulted again throughout the year. Secondly, it should be realistic with all the necessary elements and details. Thirdly, it can be made with the help of financial advisors who offer insight into the budgeting process rather than the entrepreneur making it himself with incomplete knowledge.
Softwares are also available for this purpose but the key is to select the simple and easy to use ones which do not contain specialized programs but the general ones which are not heavy on jargons. RESPONSE The article explains us the importance and usefulness of budgeting in an organization which is meant for both insiders and outsiders. Budgeting will not only allow projecting incomes and expenditures but compare them those to the real picture in order to know whether the business is fulfilling our expectations or not. It is necessary to set goals and ensure that the business idea seems to be realistic and viable in the future.
The insiders of a company need budget to regulate their expenses and account for any unexpected expenses or losses. Before making any investment, the company should consult its budget that whether it allows for it or not keeping all other expenses in account. For the outsiders, the budget serves as a statement of plans and deliverables for the year. The budget tells the stakeholders how successful the company has been on meeting its goals. Budget is a useful exercise for small sized companies since they need to operate within their small source of income and ensure that their expenses do not get out of their hands.
Budgeting also increases the credibility of a business since the stakeholders gain confidence in a business while looking at the financial statements. Today, most of the businesses do not formulate a budget and those who do consider it a one-time exercise and a formality for the shareholders. Companies should realize the importance of budgeting and take actions only after consulting their budget in order to avoid any pitfalls (Shim & Siegel, 2008). REFERENCE Shim, J. K. , & Siegel, J. G. (2008). Budgeting Basics and Beyond, 3rd edn. Wiley. Klein, K. E. 2006. Better Business Through Budgeting.