Budgeting is the process of controlling resources and allocating resources for meeting objectives. A budget is actually a financial blueprint for a specific period, usually one year to five years, sometimes longer. It can also comprise planned capital investments, planned revenues and volumes, expenses and costs, resources, liabilities and funds flow. The key to budgeting is determining what is required, setting appropriate goals and procedures to achieve those goals, analyzing and evaluating the data that helps make that decision and monitoring the results over time. That is why budgeting is an integral part of a business’s management system.
In most cases, it will use a budget for making financial decisions such as planning a marketing budget, forecasting expenditures, deciding upon short-term working capital needs and determining financing needs. The budgeting process for most businesses is a continuous one, although there may be some short-term fluctuations. However, a good budget is a permanent fixture and must be reviewed periodically to keep its integrity. The purpose of regular budget reviews is to ensure that all expenses and costs are recorded, which is to allow monitoring of costs and ensure that the budgeting procedures are still being followed. Also, reviewing the budget ensures that small business owners are not using funds in places they do not require.
Small business owners who do not have time to perform the budgeting process on their own should use a third-party vendor that offers budgeting services. These companies offer both online and traditional forms of budgeting templates and can help with the overall process of budgeting. By using these services, small businesses can determine their budgets effectively and efficiently. A budgeting template is an outline that outlines the purpose and procedures of the budgeting process and assists in the completion of the process.
As budgeting becomes more complex and time-consuming, many companies find it beneficial to outsource the entire budgeting process. Budgeting executives may choose to use a professional or in-house service. Using outside service providers relieves the burden of maintaining budgets. However, these outsourcing budgets may incur additional costs. The top management team must initially invest in training employees who it will hire for managing these projects.
Small businesses should consider the benefits and drawbacks of formal budgeting. Formal budgeting has improved financial management by reducing waste, increasing profits, and increasing efficiency. However, these benefits come at a cost. Budgeting must be completed within a formal budget process and approval by key stakeholders. The level of financial risk associated with budget approvals is also dependent on the size and complexity of the budget process and the level of organization-buyer attention the buyer provides.
In budgeting that involves spending, it is important first to define what the budget will buy and how much will be spent. For instance, if the budget includes purchasing certain goods and services, the budgeting process will not be effective if the budget does not cover these expenditures. The budgeting process for a company could be relatively simple in a large company with several products or services to purchase. However, if a small business has fewer products and services to purchase, the budgeting process can be more complex and difficult.
Small companies typically operate on a tight budget. As a result, they face the challenge of ensuring that all expenses are recorded accurately and that costs exceed income. Since budgets are usually only loosely monitored, flexible budgeting processes can adjust the budget for future anticipated income growth rates and are often used to address this concern. A good example of a flexible budgeting process is the accelerated cash flow system used by many small companies.
Accelerated cash flow systems are designed to allow for sudden increases in demand for particular products or services without increasing budgeted expenses. The system begins by utilizing projected cash inflows to fund short-term projects. As the projects pay for themselves, the excess funds are then available to be invested in, increasing the company’s capacity to meet long-term expenses. As this process is carried out, the rate of return on investment increases which, in turn, causes the budget to increase. This type of budgeting approach is often used as a means of reducing expenses and increasing profitability.