Every business has their unique mission and objectives. To fulfill these objectives top executives or small business owners try to figure out what actions to take on a daily basis. Budgeting plays a key role in guiding these actions by helping allocate resources and spending money accordingly. Budgeting allows business managers to gauge future capital investment requirements and plan for other financing needed to fulfill their objectives.

BENEFITS OF BUDGETING

Most businesses need to create a budget to plan for future cash inflows and outflows. Creating a budget can benefit you in many ways:

Projection of Cash Inflows and Outflows

You can project your cash flows by creating a budget. Some businesses are seasonal with irregular cash inflows and outflows where detailed budgeting can be even more critical.  But regardless of whether your business is seasonal or not, projecting your spending is important so that you can estimate how much money you will need in the near future. Periodic cash crises can be a sign of inadequate budgeting.

Developing Business Strategies

Budgeting helps structure your business operations.  The budgeting process requires management to set business goals and then estimate the level of resources required by different parts of the business to achieve those goals. Hence a side effect of good budgeting is forcing the organization to set and communicate clear short-term and long-term strategies and goals.

Better Measurement of Business Performance

Once the budget is created most businesses then need to develop processes for reporting and measuring progress in relation to the predefined budget.  Budgeting hence gives you a push to develop better processes for measuring your business performance around revenue, net profit and other important operating metrics. Better measurement can help give managers better visibility into the business eventually allowing for greater profits.

DRAWBACKS OF BUDGETING

Budgeting is an excellent accounting tool to estimate your future expenditures and income. However, actual income and expenses may not match with the initial estimates made by managers due to changing assumptions. Therefore strict adherence to budgets may limit your capability to deal with unpredicted circumstances. Budgeting can have the following drawbacks too:

Starving Growth Engines

Managers create budgets based on assumptions. Actual revenue and expenditures however may change due to market changes. Strict budgets can limit the ability for competent managers to adjust with changing or unpredictable situations.  This is often the case in newer, technology driven growth sectors where the ability to adapt to changing conditions can be a critical factor in long term success.

Less Value Creation

Some managers may strictly follow traditional methods of spending to budget where they prioritize projects only to make their numbers vs. prioritizing projects that create the most value for the business.  Budgeting can force managers to only meet their initially stated goals vs. allowing them to review strategies over time and adjust to what is best for the organization.

Waste of Time

Budgeting can be a complex process in larger organizations causing managers to spend lots of time defining goals, assumptions and forecasts.  This time can be limited with streamlined budgeting processes but its still a significant investment for most companies.

A rigid budgeting framework may reduce innovation and flexibility throughout an organization.  In can also create conflict when some departments miss budgets or merely manage to a budget.  Overall the pros and cons of budgeting should be weighed when considering to what extent your firm should implement budgeting processes.

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