A large part of a manager’s job is planning. Budgets are the main tool managers use for planning and for having financial control in a business. A budget is defined as a formal written statement of a manager’s plans for a time period in financial terms. In this post, we will give some tips and ideas to keep in mind when creating a budget for a company.
Why Create A Budget?
Budgeting has many benefits for an organization. Budgets:
- Require management to plan ahead
- Give definite objectives for all levels in the company
- Create an early warning system to prevent potential problems
- Facilitate the coordination of activities
- Help managers stay aware of financial transactions
- Can help to motivates employees
Budgets can be prepared for many different lengths of time. Sometimes budgets cover an entire year, or they can be longer or shorter. The length of the budget depends on the type of budget, the nature of the organization, and business conditions. For example, cash may have a monthly budget, while plans for expansion of a company may cover a 10 or 15 year period. Budget lengths should be carefully planned. They should be long enough to provide an attainable goal and the time period should minimize the impact of seasonal changes. The most common period is one year. Companies also will usually have an annual budget as well as monthly budgets in order to keep them on track.
Effective budgeting requires that a company has:
- A sound organizational structure
- Effective research and analysis
- Acceptance by all levels of management
Also, once the budget is in effect, it should be used as a means for evaluating employee and manager performance.
The accounting history of a company is essential for effective budgeting. Companies use historical accounting data from past revenues, costs, and expenses in order to determine budgets and organizational goals for the future. It’s important to understand the relationship between accounting and budgets. Accountants work closely with management in order to translate management’s goals into financial information so that goals can be communicated through a company.
Multiple Budget Documents
Just like there are different financial documents that show snippets of financial information in a company, budgets do not tell the entire story. The master budget is the document that contains all budget documents and combines them into one report. Master budgets contain operating budgets (includes goals for sales and production) and financial budgets (includes the capital expenditures, cash budgets, and the budgeted balance sheet).