Last updated on April 6th, 2024 at 08:27 pm
Budgeting is the process where an owner or a manager of a business makes a financial document of their income and expenditure within a period of time. This includes several factors like the costs towards a product or service, the revenue it's bringing, and more.
A student wishing to become a strategic CFO needs to understand the importance of budgeting. Budgeting helps set and achieve business goals, figure out the most profitable products and services of the business, attract investors and pay off debts or taxes.
What is budgeting?
Budgeting in a business is the process of preparing and following a financial document that is made considering a company's income and expenditure for a specific period of time.
For example, a budget with the projected income or expenses for the period of a month, three months, or a year. Usually, the expenses of a company are always kept at a lesser amount. When this amount is subtracted from the income, the leftover money is then allocated to various initiatives and projects. This is done to oversee that the company is not overspending and losing money.
There are a few different types of budgeting -
Activity-based Budgeting is when the goal of the company is first determined. Then the process is reversed to ascertain the costs and how they can be reduced from last year and how it can be allocated for the next.
Incremental budgeting is when the last year's budget is taken into account to create the next year's budget. Here, a percentage is calculated factoring in market growth, inflation, and more which is then subtracted or added.
Value proposition budgeting is when every cost to the business is re-evaluated and unnecessary ones are then eliminated from the next year's budget.
Performance-based budgeting is when each product or service is evaluated and the money is allocated to the ones that are beneficial for the business and taken away from the ones that are not.
Zero-based budgeting is when the value of all items included in the budget is set to zero and given new numbers after re-evaluating everything from the previous year.
How to do budgeting?
There are a few methods to do budgeting, but there are usually managers use a few uniform things for the budgeting process. The things that are always included in the budget are -
The revenue generated by the business in the previous year
Fixed costs to the business, like rent, loans, insurance, salaries, and more
Flexible costs to the business, like transportation, changing costs of products and services, raw materials for manufacturing, and more
Profit generated by the business in the previous year by subtracting costs from the revenue
The steps to make a budget are -
Calculate the revenue of the business by adding money coming from sales, investments, and others
Calculate the revenue of the business by adding money that has been spent to keep the business running
Tally the revenues and costs by subtracting one from the other to figure out how much profit or loss the business has suffered and tally the results to the accuracy with the previous year's budget
Once all the calculations are done, it's important to track if the goals are being met, the costs are not going beyond the limit, or whether more revenue is coming in
Why is budgeting important?
The most important thing that businesses get from budgeting is the financial situation of a business. This helps in planning for short-term and long-term expenses, setting goals, and more. Some of the benefits that make budgeting important for businesses are -
Setting and meeting financial goals
Every business needs to have a financial goal that can move the business forward. Creating a budget helps the manager understand what goals for the business will be achievable. It also helps businesses understand what revenues they should be generating or what costs should be allocated to achieve their goals.
Ensuring resources are available at all times
Budgeting dictates which projects, products, or services need what amount of resources. The previous year's budget can tell which product or service worked and which ones didn't. For example, in such a case, businesses can decide whether to stop selling a particular product or service. They can also decide if a product or service is worth upgradation.
Prioritising projects and taking decisions accordingly
While budgeting, the manager looks at the various projects run by the business and prioritises the ones with the most value. They consider the return that particular project is bringing to the business, the brand value and customer satisfaction the project's bringing, and how much it's costing the business to run. The projects that seem to have a positive impact on the business considering all these factors are then prioritised.
Attracting investors
In terms of small businesses or startups, it's possible that the owner is looking for investors or outside funds. In that case, it's important to keep the budget for previous, present, and future years in hand. Investors like to see that the business they are putting their money in has every penny accounted for. It also helps explain to them the financial goals of the business and how much they can help with.
Easily paying debts and taxes
Most small to large businesses have debts or loans. Businesses also have several taxes they need to pay. A budget includes debt payoff, employees' income taxes, sales tax, raw material purchase tax, and more. Budgeting keeps everything on a tight calculation which helps in the easy payout of debts, loans, and taxes every week, month, or year.
Conclusion
Budgeting is done by every business nowadays whether they are small or big. That is why learning more methodically about this critical process is important and is done here at Imarticus. Our Certificate Programme for Emerging CFOs will give you the perfect knowledge. Our partnership with IIM Indore has only been giving the students that extra edge in their degrees. Check out our programs now and become a part of a brighter future.
Budgeting is the process where an owner or a manager of a business makes a financial document of their income and expenditure within a period of time. This includes several factors like the costs towards a product or service, the revenue it's bringing, and more.
A student wishing to become a strategic CFO needs to understand the importance of budgeting. Budgeting helps set and achieve business goals, figure out the most profitable products and services of the business, attract investors and pay off debts or taxes.
