Business Budget; Importance & Components


Budgeting - How Much Influences ?

Activities of management starts from planning, so it is considered as the starting point of a business, the other activities only follow the first. Business success is the result of how much effort a business person puts into setting up plans or budgets.

Key Takeaways

Basically a financial plan for a defined period, normally a year that is known to greatly enhance the success of any financial undertaking.

Estimation of revenue and expenses over a specified future period of time and is utilized by governments, businesses, and individuals at any income level.

Corporate budgets are essential for operating at peak efficiency.

Aside from earmarking resources, a budget can also aid in setting goals, measuring outcomes, and planning contingencies.

Personal budgets are extremely useful in managing an individual’s or family’s finances over both the short and long-term horizon.

Scope of Budgeting

Budgeting is a microeconomic concept essential for every business whether it is a micro, small, medium, large, corporate or multinational entity. Only difference is the width or quantity of budgets, even if the Government also has the same. Beyond a business person it is necessary for normal individuals also, Fund inflow and outflow is a matter also for normal individuals. 

Simply a business budget is a spending plan for the business based on the income and expenses. It identifies the capital availability, estimates spending, predicts revenue, enhances investing and helps for strategic growth. A budget can help to plan your business activities and can act as a yardstick for setting up financial goals.

Once your business is operational, it’s essential to plan and tightly manage its financial performance. Creating a budgeting process is the most effective way to keep your business – and its finances – on track.

Budgeting Process 

Most large companies usually begin two to four months before the start of the financial year, while some may take an entire fiscal year to complete. Most organizations set budgets and undertake variance analysis on a monthly basis.

Individuals or families making budgets monthly for understanding the revenue meets expenses, some of them give priority for maximum utilization of available sources, better savings and wealth maximization. 

Starting from the initial planning stage, the company goes through a series of stages to finally implement the budget. Common processes include communication within executive management, collecting performance of previous years, establishing objectives and targets, developing a detailed budget, compilation and revision of budget model, budget committee review, and approval.

This process for medium business entities, for corporate or multinational entities to have their own micro level budgeting and controlling system continuously. They analyze the variance on a daily basis, it is the best tool for controlling business. 

Simply the budgeting  process:

  • Setting up a list of Goals.
  • Identify your Income and Expenses from different heads.
  • Specify available resources.
  • Separate Needs and Wants.
  • Design Your Budget.
  • Plan Into Action.
  • Periodic Review & Revision.

Result of Budgeting

Clarity regarding the implementation factors or parameters and impact of implementation in every Budgets. 

Provides revenue maximization, Cost controlling and best rate of return or profitability.  

Analysis of opportunities, sources and alternative ways to achieve the targets. 

Surplus budgets enhance savings and wealth maximization. Deficit on budgets understand the lesson for improvements. 

Ensure the best utilization of available resources means man, money, material & machine.  

Controlling is possible through budgeting and variance analysis after performance, it helps to identify the SWOT (Strengths, Weaknesses, Opportunities and Threats) of the business.

Variance Analysis

Without variance analysis the budgeting will not lift up, most of the business entities will prepare a budget for name seeks and not take care of the periodical review. Variance analysis is a gap analysis related to budget with actual. Micro level variance analysis creates a system and business entities can easily correct the system issues on time. Budgeting is a pre plan and variance analysis is a post analysis for monitoring their costs and better plan for future, to identify both plus or minus happens in the business.  Businesses may use it to calculate variance related with Purchases, Sales or revenue, Overhead, Material, Labor, and Efficiency.