A budget helps your business plan stay on track. Budgets can be powerful tools to help you achieve your company’s vision and accomplish its mission. A budget can be used to plan, control, motivate, measure, evaluate, and communicate for both profit and non-profit organizations in any industry.
1. Plan
A budget is a written plan for the future, and it helps companies anticipate problems before they occur. An organization that has no goals may not always make the best decisions, while an organization with a goal in the form of a budget will be able to plan.
Here’s why it works: the budget is a formal quantification of management’s plans.
Every organization should have goals for market share, profitability, growth, dividend payout, etc. Even not-for-profit organizations have goals, such as increased number of free meals served, improved hygiene awareness, etc. For-profit and non-profit companies’ goals cannot be achieved without careful planning about the allocation of resources and the expected results. A huge benefit: A budget lays out an organization’s expectations about the consumption of resources and the resulting outcomes in specific terms.
2. Control
A budget helps an entity control its costs by setting cost guidelines. Those guidelines reveal the efficient or inefficient use of company resources, which restrain managers from spending money on things that are not needed if they know that all costs will be compared with the budget.
Here’s why it works: Budgets help in the formulating, clarifying, and controlling parts of short-term objectives.
The budget lays out the specific revenue targets and expense limitations for each functional area and department of the organization on a month-by-month basis.
Budgets can also reveal the progress of highly effective managers.
3. Motivate
A budget helps motivate employees to do a good job.
Here’s how it works: Employees are particularly motivated if they help prepare the budget.
The budget becomes a better motivator if it is seen as realistic by employees—something they had a hand in creating. It’s also true that employees are more apt to have a positive feeling toward a budget if some degree of flexibility is allowed.
4. Measure
The budget provides guideposts for assessing success or failure in functional areas and on the part of individual managers.
Here’s how it works: The budget helps to monitor and identify the differences between actual performance and budgeted amounts.
As the fiscal year progresses, revenues, expenses, and other metrics can be compared to the budget to determine if organizational performance meets expectations.
5. Evaluate
A budget helps to evaluate the progress toward the organization’s success.
Here’s how it works: comparing actual results to the budget allows the organization as a whole to evaluate its performance.
Managers can also use a budget as a personal self-evaluation tool.
6. Communicate
A budget can help tell employees what goals the company is attempting to accomplish. If the company does not have an overall budget, each department might think the firm has different goals. For example, the sales department may want to keep as much inventory as possible so that no sales will be lost. Still, the company treasurer may wish to keep the inventory as low as possible in order to conserve cash reserves. If the budget specifies the amount of inventory, all employees can work toward the same objectives.
Here’s why it works: The budget informs employees at all levels what objectives the company is attempting to accomplish.
If the company does not have an overall budget, each department tends to pursue its own objectives without regard to what is good for the organization as a whole. Thus, a budget promotes goal congruence. The concrete nature of a budget facilitates the coordination of the company’s activities. An example is purchasing raw materials, where the proper quantity to buy cannot be determined until the projected (budgeted) level of output is established.
What we believe:
When people see the word budget, they might think of it in the old way. It was something people made once a year, shoved in a drawer, visited once or twice, and wondered why they didn’t achieve their goals.
We like to think of budgets as living, empowering tools to help entities of any kind, from individuals to families to giant corporations, fulfill their mission and realize their vision. The budgeting process is one of the many ways to facilitate communication among the operational departments and enhance coordination of organizational activities.
Sometimes it’s hard to sit down and draw up the” living” budget, especially when lots of people think of it in the old way.
If you need help clarifying your budget or selling the idea to your team, talk with your LSL partner or manager. Or contact us for guidance in budgeting or any other of the many tools that can be used to rejuvenate your team’s energies toward reaching your mission and vision.
Budget Helps Your Business Plan
