Budget management

Published on 19/03/2024

Budget management

Published on 19/03/2024
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Budget management

Budget management, or rather, the formulation of the company’s budget, is a crucial point for any type of business or enterprise. In fact, through business budgeting, it’s possible to plan long-term actions for the success of the business.

Budgetary control serves organizations to better manage their expenses and costs, as well as to better plan their actions.

Budget Management: Concept and Definition

Budget management is the practice of directing a company, defining, in volume and value, the economic forecasts of the organization’s activity, generally within a year. It’s the result of an analysis of historical data and economic and financial results, achieved and to be achieved, within a previously defined period.

It allows managers and accountants of a company to estimate the economic result and future objectives, based on precise analysis. Budget management helps define strategies and future actions based on well-defined objectives. It’s usually the accountant or accounting department of the company who deals with these financial statements, providing an average between past, present, and future results.

Budget management is related to the planning system, the accounting organization, and the hierarchical structure of the company. It’s a permanent confrontation between forecasts and achievements, based on an administrative responsibility structure within the organization, such as cost centers, income, profits, and investment. In each center, a preventive program for activity must be established.

Through this type of management, the company manages to build an orderly and logical economic model, from the balance between expenses and income, generating financial coherence to carry out each process.

Although budget management is not strictly an accounting technique, it’s expressed in numerical quantities, drawing from general accounting and analytical accounting, information regarding the organization’s activity, with the aim of preparing provisional data and ensuring periodic control of business actions.

Why is the company’s budget so important?

The budget, as well as budget management, allows the company to achieve maximum profit over a given period, thanks to an ad hoc program. In this way, the company, regardless of its size, can organize its work and projects according to the planned objectives and deadlines.

Having proper budget management allows defining precise, but above all concrete objectives, providing the necessary guidelines for all teams to carry out effective and profitable work.

It also allows for comparisons between actions taken in the past and those taken in a closer period and planning more effective future actions.

Having budget management also allows for safer adjustments and changes that may be necessary and beneficial for the evolution of the company’s activity and its economic gains, modifying forecasts and changing parameters.

The budget is an effective tool for companies to manage and control their expenses and costs.

What is the budget calendar?

The company’s budget is created to guide and establish the work to be done, generally over the next twelve months. For this, a budgetary calendar is created, which indicates the dates on which each action must be carried out, as well as assigning the people responsible for the execution of these actions. It also manages the phases of the costs of each business project.

The planning of these actions can be divided into several months or quarters; this approach allows for precise management of each individual project and evaluating its progress.

The monthly subdivision of planned actions is not just a simple economic calculation; on the contrary, it must be a reasoned and precise subdivision of the various financial projects, funds, and resources to invest in achieving a specific goal.

How to create a business budget?

Formulating the company’s budget, or rather making real forecasts, is not easy; however, it’s a fundamental activity for any company.

The initial phase of budget formulation aims to organize corporate ideas regarding available funds, objectives, and needs, that is, in relation to the resources existing in the company. During this primary phase, the perspective is general; that is, the goal is to have an overview and not a specific vision of the business. For this, it’s important to follow a series of guidelines.

Analyze the components of the company’s budget

The preparation of the company’s budget depends on four fundamental aspects that allow for a correct analysis of the company’s economic performance:

  1. Economic budget: It’s about managing and planning costs and income during the considered period.
  2. Investment budget: It’s a summary of the strategies implemented in the previous period and the planning of future activities.
  3. Financial budget: It’s the planning of activities aimed at recovering capital and evaluating the strategies to be adopted.
  4. Production budget: According to the type of business of the company, it’s the planning of the quantity and type of products to be sold.

We recommend starting with a precise analysis of the market, sales, and income, which are ultimately the main objective of the company.

Identify expenses, costs, and purchases

For the company to plan future strategies with confidence, it’s important to also take into account the necessary purchases for production, material consumption, the amount of personnel, and the execution time.

Having a set of costs that the company must incur to carry out a certain production serves to estimate future costs in relation to objectives and required labor.

It’s important to analyze the budgets used in the past, highlight each detail, to develop a forecasted income statement and predict future results.

Estimate forecasts

A forecast within budget management is a projection or approximation of expenses, costs, and potential income. It’s not possible to predict exactly how much the company will sell or how much income it will generate, but an estimation can be calculated.

The forecast of a business is a conjecture of what may happen, based on a series of criteria. Its estimation is very useful because it takes into account all aspects of production: income, personnel costs, maintenance, administrative costs, costs of any external service, fixed costs, acquisition, and marketing costs. Refunds of expenses, management costs, and financial costs are also considered.

The forecast estimation is the approach of the income and expenses to face. It’s a global but specific budget, and it’s advisable to consider a certain margin of error or variability.

Variables can always be present, that is, unexpected events that vary the final results to a greater or lesser extent.

Without forecast estimation, there is a risk of easily losing control of expenses and costs, income, and business objectives.

Tips to Avoid Common Mistakes in Budget Management

To maximize business performance, it’s advisable to avoid certain behaviors during action planning that could be detrimental in the future:

  1.  Avoid postponing budget planning. 
  2. Dedicate time and care to crafting the company’s budget, avoiding hasty and superficial methods.
  3. Always highlight key performance indicators (KPIs) to keep them under control.
  4. Have a precise understanding of the market in which the company operates, paying attention to current and potential competitors.
  5. Maintain regular control, preferably on a monthly or weekly basis, of the results obtained and propose improvement actions.
  6. To obtain objective data, it’s useful to support budget management with cost and project control software. 

Such systems save time and money.

  • In conclusion, the company must develop a budget plan with key actions and strategies, along with clear and concrete objectives, focused on performance and benefit for the business, all while following guidelines that guide its execution.
  • However, if planned actions and associated objectives are not regularly monitored and adjusted, the company will not be able to adapt to market realities or redirect its activities to promote growth and business success.

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