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17. July 2012

The Importance of Budgets in Business

Filed under: Business Finance — Tags: , , — John Delaney @ 13:24

A well planned budget can help a business stay aliveFor any business to be successful, there has to be financial control. In other words, those running the business have to be aware of how much money is going out and how much money is coming in. Without such knowledge, the business is headed for bankruptcy. By creating a budget and a process by which to administer it, a careful check can be kept on the business and its state of health at any particular time.

Business plans

Every business needs a business plan to show where it’s headed. Future development depends upon sound forecasts and properly thought-out objectives. A sound budget can be helpful in raising outside finance as well as being a measure of success and helping the business grow. Internally, it can help a business control its cash flow, giving it the wherewithal to invest in new opportunities when they arise. As a business expands, it all becomes very complicated as many different departments and needs require attention, but by controlling the finances, the meeting of current commitments is ensured, appropriate decisions can be taken in order to meet the business objectives, and sufficient finance can be put aside for future projects. The budget outlines not only what money is spent on, but also how that expenditure will be met. It is a planned outcome and not to be confused with a forecast, which is a prediction.

Benefits

Tight financial control enables a business to manage its money in the best possible way, to allocate resources to projects in the most cost-effective manner, to monitor the performance of the business and keep it on track in order to achieve its objectives, to maintain efficient decision making, to identify and rectify any potential problems before they appear or become too bad, such as the need for extra short-term finance, to make confident plans for the future, and to motivate the staff as they know that the business is progressing in the right direction.

Once drawn up, a budget isn’t frozen in time. Indeed, for a business to get the most from it, it requires constant monitoring in order to meet the challenges and changes of the dynamic market place.

Picture: FrankU – Fotolia

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