Benefits of Budgeting

A budget helps an entrepreneur to accomplish several broadly important objectives:

• To translate a strategic plan into actions

• To serve as your formal financial plan

• To establish benchmarks

• To help identify deviations from your vision

• To reinforce accountability

• To allocate resources

To translate a strategic plan into actions

A strategic plan consists of your company’s overview and description, strategy, financial situation, and action plan. A strategic plan will be used to envision your goals for the foreseeable future. It also outlines the goals that your budget should accomplish.

A budget is the part of the strategic plan that outlines what projects and resources you have decided you will use to accomplish your goals.

To serve as your formal financial plan

Depending on the stability of your industry, your strategic plan and budget might project goals for one year, five years, or twenty years. Entrepreneurs in stable environments might have strategic plans for a number of years. Fast growing companies in rapidly changing environments might place a higher premium on fast reaction time and quickly issue new budgets as related details change.

To establish benchmarks

The budget shows what you must do to have the resources available to accomplish additional tasks, such as hiring additional staff, investing, or implementing advertising programs. These goals help you and your employees, if you have any, to stay focused on the direction of your business and to determine if you are succeeding and meeting your own expectations.

To help identify deviations from your vision

When benchmarks, established in your budget, are not met, your budget serves as a tool to determine why. Comparing your budget to actual performance for a given month helps to identify trends or problems before these variances can negatively affect your entire business.

To reinforce accountability

Your budget reinforces accountability by establishing a record for the goals that you have set. If budgeted goals are not reached, or if goals are surpassed by a significant amount, you will need to know why. The reasons for the variance can then be resolved, if the impact is negative, or repeated, if the impact is positive.

To allocate resources

Budgets allocate resources by “pre-authorizing” projects to fulfill your goals. When your budget is implemented, you have granted yourself the right to spend the allocated resources on designated projects in order to fulfill your goals. These projects can include hiring additional staff, expanding into a new area or territory, or purchasing a new piece of equipment to facilitate your business’ growth.

All of the activities on your “wish list” for a certain period may not be feasible, based on your sales and income projections. Use your budget preparation as an opportunity to review your priorities and how they fit into your strategic plan. Knowing what not to do (and spend) in a particular timeframe is almost always as important as knowing what to do (and spend). That’s why preparing and maintaining budgets is imperative to your success.

— Excerpted from Preparing Budgets by Renaissance Training