Uses and benefits of a budget

Uses and benefits of a budget

Preparing a budget gives business control over finances most efficiently. Money advisors and financial experts recommend using a budget as the primary tool to attaining financial freedom. A budget not only limits unnecessary expenditures, but it also helps to arrange the spending according to priority. It can be used to plan both current and future incomes and expenses which motivates a business to keep eyes on the prize. Creating a budget for a company can be demanding, unlike personal budgets which do not require the use of financial statements. Running a business and keeping track of the financial flows is challenging, and that is why keeping proper books is advisable for small to large businesses.

Advantages of preparing a budget

Creating a budget controls the income and expenditures effectively in business. The process of creating a budget starts by tracking past income and expenses. The data on income and expenditure can be retrieved from the income statement and balance sheet. The income statement shows the profit and loss of a business over a financial year which is usually one year. The income statement is one of the main financial statements a company uses in Budgeting because it takes into account all revenues and expenses from both operating and non-operating activities. A balance sheet is used to indicate the net worth of a business by listing the assets, liabilities and capital in a financial year. Bad debts can be identified using the balance sheet for the necessary actions to be taken.

A budget is used to make a business plan for both the short-term, which comprises of the daily expenditures running of a business and the long-term goals (Shim & Siegel, 2009). The short-term expenditure can be regulated by cutting down unnecessary expenditure. The long-term expenditure involves capital budgeting to make rational decisions on fixed assets such as purchasing and replacing new machinery, and investments in research development projects in the business. The long-term expenditure can also be controlled using Zero-Based Budgeting (ZBB) to avoid incurring expenditures that do not add value to the business. Zero-Based Budgeting requires all expenses to be justified at the beginning of a new budget period.

A budget is used to evaluate the performance of a business in every department which highlights the business’ weak points (Sivaramakrishnan et al., 2008). Making a budget helps to identify insignificant details in the business process, such as slow-moving stock and small variable costs incurred in the daily running of the business. All the management levels can be evaluated using their cost of operations and the income they generate towards the business. Evaluations and appraisals keep the managers in charge of different functions at their best performance by using the allocated resources to meet the target.

A budget is used to review the profitability of a business by minimizing expenditure and investing in areas that can generate more income (Bragg, 2020). The bad debts can be minimized and active recovery done by the relevant departments to avoid accruals that can paralyze the business performance. A budget also helps to determine the expenditures on long term fixed expenses that can be changed over time to optimize the distribution of resources.

Conclusion

Preparing a budget requires the use of accurate financial statements that reflect the performance of the businesses every financial year. Using the budget to attain the set goals also requires constant evaluations throughout the financial year to keep track of the performance. A budget is essential in the business as the other financial statement and should, therefore, be prepared using the realistic projections based on previous year’s performance of the business.