Blog
The Best of Elementor
The Best of Elementor Considered as one of the best for website design, their drag and drop page builder, and their first rate hosting is
Alan
Why does my company need a budget? The purpose of using budgets to manage financial resources is to set estimates for the future. By having these estimates, it enables us to try and keep within our financial spending limits. Planning and decision making is key to developing the plan for the up-and-coming tax year to ensure that our company doesn’t overspend money that isn’t in the ‘pot’. The plan can help determine what our costs will be and help us to find ways of incorporating these into our prices. We also need to prepare for unexpected occurrences that may eat into our budget, such as equipment breakdowns etc. Therefore, it would be crucial to have a ‘cushion’ amount set aside for these unexpected emergencies. Cultural Enterprise Office (undated) describe it as a “contingency to finance the unexpected” (Cultural Enterprise Office, undated) so the variable doesn’t rise too high.
Analysing This Year's Spending
Incremental Budgeting
Incremental Budgeting examines the previous years’ budgets and takes into consideration the costs of inflation, staffing levels, energy prices and any equipment replacements that may need to be made over the following year, etc. By using our actual level of spending numbers from the previous year, it can help us to set the budget for the following year. If we see that our spending levels are rising, then we need to investigate and find out where this is happening and see whether we need to review our performances i.e., a supplier may have put up their prices, we may need to research cheaper alternatives that don’t compromise on performance. If we do see a variable that’s a lot higher than we expected, then we must examine where these occurrences happened and monitor our financial performance for the next year to make sure this doesn’t happen again.
Objectives
Budgeting objectives consist of enabling the company to maximise profits while keeping the costs controlled without compromising on the value of the service or product, all while maintaining customer satisfaction. The organisation must ensure that the objectives are made clear to everyone from the start, so everyone is able to meet them successfully. Effective communication is vital when discussing and planning company budgets. For example, the communication would be considered effective if a budget meeting is held where all key members of the organisation come together to discuss the plans. The meeting would enable all key members to put together a plan and ensure that they are all able to coordinate actions together. The key parties of the meeting would then be able to take this information to their teams and begin implementing them. Training sessions and team meetings would be perfect times to start the process.
Estimations
Estimations are used in a budget to help forecast your business’ finances for the business year. It’s important to try and get this estimate as accurate as possible so the business can thrive. When estimating what the budget should look like, you should have a look at all the business’ income, then deduct the fixed and variable costs of the business from that figure. By doing so, we can try to build a fairly accurate picture of what will be included in the estimate. For example, fixed costs would include things that are paid monthly (sometimes annually) that never stop, for example, rent/mortgage on the business premises, insurances, and supplies etc. Variable costs would include things that go up or down such as “Owner’s salary…Office supplies…Utilities “ (Turits, 2020) etc. Hutchings (21/05/2021) discusses the importance of incorporating a prediction for “one-time costs” in the budget too. This can be extremely helpful, for example, when you may be thinking of setting up a new service and require new equipment for that service. Sometimes a business needs to deal with emergency costs, for example if something breaks. It is good practice to have an “emergency contingency fund” (Turits, 2020). So, if you estimate a profit and loss statement, you can examine how much money came into the business and decided how much would need to be budgeted for each expense too (Hutchings, 2021).
How Will the Budget Be Presented?
Consideration needs to be given to how the information for the budget will be presented. If we didn’t use a standard format to present the information and everyone passed on the relevant information based on their understanding of it, then there would probably be conflicting information based on their understanding of the events. Therefore, the purpose of agreeing the format in which the budget will be presented is extremely important. If you set an organised standard format for budgeting, it will become easier for people to understand as they will be used to the layout (if you use this format enough times). I believe the higher the understanding of something, the higher the participation rate which should lead to more people being able to understand why the changes are taking place and agree on the timescales and work needed to change. There are six key features to setting up an agreed format and these include:
Purpose of the budget – As discussed above (in the objectives section), all members of the company must know and understand clearly what the purpose of the budget is. Therefore, it is important to identify priorities when preparing a budget because the business will need to achieve certain aspects to thrive.
Duration of the budget – It is extremely important to identify timescales when preparing a budget, especially a longer-term budget, so you can ensure that various stages are met effectively. Short monthly targets could be set for the stages as well as 6 monthly or yearly targets to ensure everything is running as expected. So, you see, everyone must understand the duration of the budget.
How the information will be presented – As discussed above, it is important that we take into consideration how the information will be presented because everyone perceives information differently. You can have a team of people listen to an informative lecture, and each one of those members of the team will take away their version of events. This information won’t always be the same as everyone else’s. Therefore, it’s better to have a standard format for budgeting, so everyone knows what’s happening and things aren’t left to anyone’s individual concepts.
Sales budget – It’s obviously important to decide what budget will be used, so for this I will supply an example of a sales budget. Rosemary Carlson. (2021) looks at the “Components of a sales budget” and reveals that if you plan and detail your budget to the nearest amount you believe will be spent, then the business will thrive. They refer to three crucial pieces of information when planning a budget, which include an “Income statement” which supply all the information you need to see your profit and losses for the year. A “Balance sheet” shows how much the company is worth. The “Cash flow statement” (Carlson, 2021) allows you to examine the financial incomings and outgoings. By examining these documents, we can build on this to prepare for the following year’s budget.
Who receives the information – It’s also important to decide who receives the information because if the organisation doesn’t appoint a specific member of the organisation to receive, hold, monitor, and control the budget, it could become a fundamental problem (as discussed in how the information will be presented section above).
Financial Resources
So, we’ve discussed the timescales and the need for setting priorities, but what about financial resources? Financial resources are crucial when preparing a budget because we can determine where the money is spent in the business. A Senior Manager, for example, will have a clear definition of what financial resources are available to the business. Therefore, by collaborating closely with the senior manager, this will give you a clear picture of where your business’ crucial spending is. If it’s clear that some parts of the business are overspending, then you can decide whether any cuts need to be implemented.
Why must I negotiate an agreement?
The purpose of negotiating and agreeing a budget is to ensure that an integrated approach, to the business, is taken. For example, CFI (undated) states that it’s a process that “combines both top-down budgeting and bottom-up budgeting….” and “…does not impose the budget preparation process on a single level, but rather allows shared responsibility between superiors and subordinates” (CFI, 2020). Therefore, when the senior managers document what targets they are trying to meet, this is then passed down through the managers to allow them to discuss and decide what projects would need to be put in place to achieve these goals and how much money they would need for these projects (CFI, 2020). When they have decided what is needed, they are able to present their information in front of the senior management and seek approval for their plans. Once these plans are approved, they will need to be implemented. Again, the managers who have taken part in the budget decision-making process will be able to present it more effectively to their teams in the business. They should understand it enough to be able to explain and answer questions that may arise when presenting it to the team members.
Monitor, Control, Record
Good record keeping in a business is extremely important. Not only for the HMRC to be able to calculate the taxes, but also for your business to understand what profits it is making. When the budget needs to be created at the beginning of every budget year, the estimates for the year ahead need to be compiled using the data from the previous years’ records. If the business doesn’t keep records, monitor nor control the business’ incomings and outgoings, you wouldn’t be able to compare the estimated figures in the budget with the actual figures as there would be nothing to compare so you wouldn’t be able to see any variances throughout the year that may require urgent changes.
So, the reason it is important to monitor, control and record income and expenditure is to ensure that the business works to the recommended budgets and can check to see where any shortfalls or overspending is happening. If your company’s shareholders ask for an audit to take place, then good record keeping will help the auditor to decide whether all your financial records are correct and up to date. Bad record keeping would result in a longer, confusing audit as the auditor and the company would need to examine everything in detail and try to find any records that may have been misplaced or thrown away.
