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Budgeting for operations and finance is an important tool in any business, no matter how small. Budgets serve several purposes in how a business plans and operates into the future. Budgeting takes work, but that work will pay off.
MLA Team members have extensive experience with budgeting for operations and finance for different sized businesses and in various industries. Our team also has expertise with many of the budgeting software platforms that are commonly in use.
MLA serves small to midsized businesses in the southwest region of Ohio. We have team members in Cincinnati and Dayton in addition to Virginia and Florida.
A budget is a tool that managers use to plan and control the use of scarce resources. A budget is a plan showing the company’s objectives and how management intends to acquire and use resources to attain those objectives.
Organizations often think in terms of a master budget, which contains both a planned operating budget and a financial budget. The planned operating budget helps to plan future earnings and results in a projected income statement. The financial budget helps management plan the financing of assets and results in a projected balance sheet.
In a business, the budgeting for operations will include preparing projections for the next accounting year. These projections include amounts for sales, producing goods, and departmental expenses. These budgets are then summarized into a master budget or profit plan. If an organization has a substantial cash operation, cash receipts and disbursements can be used to form a cash budget. Out of these budgets, projected financial statements, also referred to as Pro-forma financial statements are created.
The budgeted amounts, once they are revised and approved, are used as a guide or road map in controlling the next year’s business activities.
Financial budgeting involves future projects which overlap several or many future accounting periods. This usually means listing each project along with its cash outlays and expected cash inflows for each year. The amounts should be discounted to their present values and also ranked by priority and profitability.
Once prepared, the financial budget provides a guide for investing in future fixed assets as well as arranging for the financing of the projects.
Once the budgeting for operations and finance process is complete, the budget accomplishes several things. A budget: (1) shows management’s operating plans for the coming periods; (2) formalizes management’s plans in quantitative terms; (3) forces all levels of management to think ahead, anticipate results, and take action to remedy possible poor results; and (4) may motivate individuals to strive to achieve stated goals.
Companies can use budget-to-actual comparisons to evaluate individual performance. As a result: (1) businesses can better coordinate their activities; (2) managers become aware of other managers’ plans; (3) employees become more cost-conscious and try to conserve resources; (4) the company reviews its organization plan and changes it when necessary; (5) managers foster a vision that otherwise might not be developed.
Failing to budget because of the uncertainty of the future is a poor excuse for not budgeting. In fact, the less stable the conditions, the more necessary and desirable is budgeting, although the process becomes more difficult.
Budgeting involves the coordination of financial and nonfinancial planning to satisfy organizational goals and objectives. No foolproof method exists for preparing an effective budget.
However, budget makers should carefully consider the conditions that follow:
All management levels must be aware of the budget’s importance to the company and must know that the budget has top management’s support. Top management, then, must clearly state long-range goals and broad objectives. These goals and objectives must be communicated throughout the organization. Long-range goals include the expected quality of products or services, growth rates in sales and earnings, and percentage-of-market targets. Overemphasis on the mechanics of the budgeting process should be avoided.
Management uses budgets to show how it intends to acquire and use resources to achieve the company’s long-range goals. Employees are more likely to strive toward organizational goals if they participate in setting them and in preparing budgets. Often, employees have significant information that could help in preparing a meaningful budget. Also, employees may be motivated to perform their own functions within budget constraints if they are committed to achieving organizational goals.
People should be promptly and clearly informed of their progress. Effective communication implies (1) timeliness, (2) reasonable accuracy, and (3) improved understanding. Managers should effectively communicate results so employees can make any necessary adjustments in their performance.
If significant basic assumptions underlying the budget change during the year, the planned operating budget should be restated. For control purposes, after the actual level of operations is known, the actual revenues and expenses can be compared to expected performance at that level of operations.
Budget follow-up and data feedback are part of the control aspect of budgetary control. Since the budgets are dealing with projections and estimates for future operating results and financial positions, managers must continuously check their budgets and correct them if necessary. Often management uses performance reports as a follow-up tool to compare actual results with budgeted results.