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Budgeting

Budgeting in business is the process of creating a strategy around income and expenses. It refers to setting aside funds for specific business activities on an annual basis to achieve business goals without exceeding the 12-month period.

The goal of any corporation is to generate revenue, but it also needs to be profitable. Thus, the budgeting exercise serves as a plan of action for managers to ensure all their financial decisions contribute to building a successful business.

Budgeting is a key component of a company's business plan because it allows you to forecast future expenses and keep track of your finances during a specific period of time.

The importance of budgeting for businesses

Budgeting allows you to plan for your future financial performance, so you don't end up spending all your money on unexpected expenses. The ongoing process of planning out your finances lets you set realistic goals and avoid taking unnecessary risks that could damage your financial health.

A solid business budget gives you a clear picture of what your monthly expenses are, including both fixed costs and variable costs, and allows you to see exactly where your money goes and if you need extra cash.

It also helps you visualize your resources, prioritize projects, and uncover financial opportunities.

Types of budgets for companies

The budgeting process can be challenging as several factors (such as the capacity of your customers to pay you for your services, your actual income, or the regularity of your sales volume) may influence its execution.

However, there are various business budgeting approaches. Below are some of the most common strategies used by corporations to forecast their future numbers and business performance:

  • Master budget: this is a projection of the overall company. It typically forecasts an entire fiscal year and includes estimations on the income statement, balance sheet, and cash flow statement.
  • Static budget or incremental-based budget: this is based on the expected inputs and outputs for each business unit. It looks at fixed costs and is often the first step of budgeting, as it indicates how much money an organization has and helps prioritize the spending accordingly. It uses historical data from the previous budget period to create future estimations.
  • Cash flow budget: This budget helps senior management understand the cash inflows (revenues) and outflows (expenses) generated by a business during a particular period of time. This is especially important considering expenses must be paid on time from the cash generated.
  • Operating budget: this type of budget looks at revenue and costs from the company's daily operations. It focuses on operating expenses and earnings while excluding items such as capital expenditures or long-term debt.

How to implement budgeting strategies?

The first step in budgeting is to create a financial plan. This will help you understand where your monthly income comes from, how it is spent, and what the future holds for your company. Once you have this information, you can start making strategic decisions about how much money you want to allocate to your business to meet your short- and long-term goals.

Here are 5 budgeting tips for setting up effective corporate budgets:

1. Determine how much income comes in and out on a monthly basis and from which sources

2. Create a financial plan

3. Set financial goals and priorities by departments

4. Share your annual budget with other senior managers involved

5. Implement collaborative tools for budgeting across your organization and track progress month to month

Budgeting

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