Failing to plan is planning to fail. We all know about the importance of planning in our day to day lives. But how well do we plan for our business? An efficient way to do planning is to create a budget for business. In this article, we will discuss various points to keep in mind while drafting a budget.
1. Align the budget with the vision of the company
Having a clear vision statement is a critical success factor for any business. When a budget is formulated, it needs to be ensured that the long-term objectives of the budget align with the vision of the company. A budget can be formulated first keeping in mind the long-term goals of the company. Then it can be broken down into mid-term and further to short term goals, which are achievable and measurable.
2. Cost saving
While preparing the budget, each item of expenses can be checked in detail to see if there is any scope for cost saving – whether any routine work can be automated or it can be delegated to a junior level staff.
3. Revenue enhancement
It will be ideal for business entities to identify the growth areas, need for developing new products or services, revenue vs margin of each product/services, so that they can focus on items generating more margin, rather than focus just on revenue. For example, Product A might give 10,00,000 revenue with just 30% margin whereas Product B might give Rs.8,00,000 revenue with 40% margin.
4. Reduce debt
While planning, it is imperative to identify and reduce the debt component to the extent possible. This helps to save interest and related finance costs and reduce liabilities of the entity.
5. Plan for capital expenditure
Adequate savings must be provided to plan for capital expenditure – for capacity enhancements, new product developments, etc. While preparing the budget, we should visualize the organization achieving its next level and plan should be made accordingly.
6. Provision for contingency
Fund should be provisioned to meet any extra ordinary expenses or contingency.
7. Cash flow management
A budget helps a long way in cash flow management – to identify areas and timing when cash will be received, and this is immensely helpful while scheduling expenses and planning for additional investments.
8. Share budget
Many times, departments focus on their day to day issues and might miss the overall goal of the company. Preparing budget department-wise and sharing budget with them helps them to align their activities with the overall company’s vision. It also helps them to plan expenses within the budget allotted to them.
9. Compare actuals and review budget
Actual performance must be compared with the budgeted performance on a periodic basis – weekly/monthly/quarterly and identify reasons for variance if any. Accordingly, budget needs to be reviewed and modified for future.
Many business entities consider themselves to be small in nature and hence they overlook the importance of budgeting. It is remarkable to note that all successful organizations invest adequate time for budgeting. Budgeting is an ongoing process. In many cases, preparing budgets is considered as a one-time activity, which should not be the case. It should always be followed by monitoring, reviewing and revising budgets.
Author: CA. Deepalekshmi, FCA