A budget is your businesses future focused plan or projection of how to control costs and earnings, based on what you know – now. It maps out the expectations of what the company aims to achieve and is recorded in a document or documents. It encourages business owners to get ‘out in front’ and focus on growing profits, reducing operational costs and improving profit margins. Because of its annual cycle it also imposes structure, discipline and deadlines around constructing plans for the upcoming year. By playing things out in advance, and delegating responsibilities, you have a better chance of making sound business decisions, continuous improvements and holding people accountable.
The budgeting process sets out measures and indicators of performance, plotted on a monthly timeline. This gives you to opportunity to map progress against, by putting ‘markers’ out there in front, for you to check against as you pass by. It is not the numbers themselves that make it worthwhile – it is the groundwork and strategic thinking behind the numbers that gives the budget meaning.
Benjamin Franklin was one of the Founding Fathers of the United States who helped to draft the Declaration of Independence and the U.S. Constitution in 1776.
Benjamin Franklin once said, “If you fail to plan you are planning to fail”
Everyone knows, the thing about plans is that things rarely go to plan. A lot of people question why they should bother to do a budget. Having one does not guarantee that you will control costs exactly as they are laid out on paper; A budget does not guarantee that your estimated paper profit will materialise either.
The budget is also a way to communicate that plan to other stakeholders in the business and coordinate how different part of the business will interact over the year.
Formulated and used as an internal tool by management, a budget is much more than just numbers. Everything included in the budget must be able to be explained or justified in relation to the overall strategy of the business. Employees are more likely to strive toward organizational goals if they participate in setting them.
Budgeting is one of the 5-Pillars of ‘Profit Metrics’. The ‘Profit Metrics’ method embeds reliability and predictability into business finances. It allows owners to anticipate, evaluate and navigate. It enables them to get out in front of the business, be strategic and boost their bottom line.
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