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Business Budgets

Why do we need them?

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

Objectives

Estimations

How Will the Budget Be Presented?

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.

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