The word “budget” can evoke a range of different feelings: dread and disappointment or pride, a sense of direction and achievement. However you might feel about them, the truth of the matter is budgets are a highly underrated business tool.
We have all heard plenty of stories of organisations preparing budgets. Many of these stories relate to unrealistic budgets being forced onto various managers or organisations of which they have no hope of meeting. This scenario gives a bad name to what is actually an important management tool.
The use of a properly calculated and constructed budget is a great management tool to guide a manager to both improve income and expense control. Further, the budget is a realistic target for the manager or business owner to strive to achieve.
It is how we deal with the fact that these targets are sometimes not met that is the key issue. The budget outlines expectations generated earlier in the financial year and when these expectations are not met, the business operator can examine why something that was thought to occur did not occur. The reason why something did or did not happen as expected is the important fact. This information may go unaddressed if budgets are not set or if actual performance is not actively and consistently measured against the budget.
As an example, the budget may be set on the basis that the business plans to sell a specific number of units of a product during a specific month of the year. If this target is not met, the discussion can ensue on what can be done on an ongoing basis to ensure that the situation can be remedied. The variance from a budget and the reasons behind the variance are an important reality check to business operators.
A business owner can gain a tight grip on the gap between their hopes and expectations and the real performance of their business by carefully setting, monitoring and reviewing their budget. Businesses that make this an integral part of their monthly financial reporting find that the gap between expectations and actual performance narrows over time.
Increasingly businesses are setting shorter term budgets, quarter by quarter, and reviewing them as they go. In a more dynamic and rapidly changing environment, business planning cannot always be made years in advance. It is the business owners that embrace this environment and make effective use of management tools such as budgets that survive and thrive.
Abby Practice is starting the new financial year with a complimentary workshop on budgets and planning on Tuesday 3 July, at Suite 702, 90 George St, Hornsby from 12 to 2pm. Seats are strictly limited, so to reserve your spot click here to register.