The Importance of Company Budgets

Posted 30/08/2019

Budgets are a major part of the planning process for the business. Specifically they are a short-term plan to outline what the business wants to achieve by the end of the period. It’s common for a budget to run for twelve months and cover a calendar or financial year. While this creates a clear guide for the managers for the year ahead, the rigid twelve months is a long commitment period. Major events can happen within that time that the budget won’t have accounted for so if the plans deviate significantly this can cause knock-on effects for the remainder of the budget and plan.

An alternative to a 12-month budget is to use a rolling quarterly budget. This budget would first only budget for the first 3 months, then the second budget will be made during the first quarter itself, the third made during the second quarter, and so on. The budgets are then made and reviewed so frequently that it can also mean that more topical issues can be addressed, and targets can be reflected for more realistic and known outcomes. The downside is that only the next 3 months will have been budgeted for, and budgets are constantly changing, and this itself can create uncertainty of goals in the long term.The planning process includes the preparation and implementation of the budget but this is not the only bit of planning managers carry out that are affected by the budget. The budget encourages additional planning to meet the goals set out for department and to avoid any hasty decisions based on anticipation of problems. Without a budget, managers have more time to focus on the pressures of day-to-day activities and to act without thinking of the future impact their actions have.

Coordination and communication are encouraged with access to the budget, managers of departments know what they must do to meet goals and what they can expect from their co-workers. Each department would have its own ideas for the business, such as purchases may want to buy large quantities for a discounted price, but this example would affect another department who want to keep stock levels low for cost purposes. With a budget, the department manager can check which departments their decisions affect. If there are any problems with a manager’s preferred action this can be discussed with other managers to resolve the conflict or share ideas and reach an agreement that benefits the company.

How the budget is presented to the managers and employees is important. If done correctly, the budget will come across as a challenge which in turn motivates employees towards achieving this goal as a team. There may be some benefit offered if a budget is achieved, such as a bonus pay-out or a promotion. If the budget is not presented correctly then its presence can be taken as a threat by managers who are likely to resist meeting the target and cause disruption overall.

The performance of the managers decisions can be tracked by using actual figures against the projected figures set up in the budget. Regularly tracking progress can help identify deviant figures early and attention can be made to them rather than effort being spent in areas where it is unnecessary.

Tags: Running a business, business set up, company budgets, limited company, sole trade