Mastering Finances: The Role of Budgeting in Business Success

Budgeting is critical to financial success. Studies of differences between successful and unsuccessful new businesses consistently find that businesses that carefully develop and follow budgets increase their chances of survival and success. The budgeting practices of successful businesses are (1) maintaining a complete and up-to-date set of financial records, (2) having financial records audited or checked by an experienced accountant, (3) keeping accurate records of business inventory and assets, and (4) using financial budgets as planning and management tools.

A new company’s business plan should include financial budgets for the first year of operations and more general financial projections for the next year or two.

Unfortunately, many small businesses do not maintain a written budget for long even if one was developed as part of the business plan. Worse, a large number of business owners and managers report they don’t have confidence in their ability to plan and use financial budgets. A budget is a written financial plan for business operations developed for a specific period of time.

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Budgets are often developed for six months or a year but can cover a longer or shorter time period depending on the type of budget and the nature of the business. Budgets project and offer detail on the business’s estimated revenue and expenses over the time period. Based on these estimates, businesses can set financial goals. They then use the budget to develop operating plans for that time period. By comparing actual results with financial goals and budget details throughout the year, managers can control operations and keep expenses in line with income.

A realistic budget can prevent overspending and be used to plan for needed income, including the possibility of borrowed funds. Actual budgeting procedures depend on the type of business. For a small business, the process is mostly one of budgeting start-up costs, sales, expenses, purchases, and cash. Large businesses have a number of specialized budgets that predict the financial performance of departments and divisions of the company as well as specialized operations such as research and development, information technology, human resources, production, marketing, distribution and logistics, and many others.

In large businesses, the final overall budget for a business is made up of several specific budgets, such as the sales, merchandising, advertising, cash, capital, and operating budgets. Most specialized budgets are based on sales and income projections. However, in some types of businesses, either the production capacity or the financial capacity of the business or the unit for which the budget is being prepared must be determined first. Sales and all other estimates are then based on the amount that can be produced or the available financial resources for the time period.

References

• How to Write a Business Plan 101 This guide to writing a business plan will outline the most important parts and what should be included in an effective plan.
• Capital Budgeting: Definition, Methods, and Examples