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Should My Business prepare Budgets and Forecasts? What is the real Value?

Guest post by: Stan Prokop

Article Overview: The article discusses the value of the budget and planning process in firms of all size,

Should My Business prepare Budgets and Forecasts? What is the real Value?

More so than ever business owners and managers are inundated with information - computers, other technologies and of course the internet have given management the challenge ; that challenge is simply ' What quality information do I have to cope with business success and growth - how do I use that information?

We all probably know some companies, large or small, that are probably 'over-budgeting and over analyzing data?

To be done properly traditional budgeting and planning should probably be started months in advance of deadlines. A great time to start is of course before the next fiscal year. What is the business trying to do via this process? Well, it is trying to predict, for lack of a better word, next year's financial performance. Normally this is done on a month by month basis. In larger companies of course there is even more detail, i.e. by subsidiary or division, department, etc.

We have all heard the term 'garbage in, garbage out '. This is a very relevant term in budgeting, in that a solid budget, or budget process will involve the effort of all responsible, both owners and managers, and responsible managers. Great companies put a lot of discipline into this process.

Budgets have value because they become a plan of action in effect. Budgets become truly valuable when they get commitments from the various stakeholders re: performance, targets, goals, etc. We can fairly safely make the statement that if a business has a solid budget process, and then fails to meet those targets, then that whole process in essence is a failure of a specific party, i.e. management, operating staff, sales perhaps, etc.

As we all know, creating budgets and then having forecasts fail is generally because there are real world reasons for variance to the targets that were planned

Technically speaking accountants and finance staff usually have responsibility for budgets. They also play a key role in score-carding the budget. Naturally management has to then determine why variations happened, and if they are negative, what could have been done to avoid those variations.

Budgets are valuable for the following reasons:

They provide valuable input and allow management to set the tone for moving forward on specific initiatives. Although expensive to sometimes prepare re: time, meetings, manpower, etc they can provide a true focus on what problems need to be tacked in advance. Another value of budgets is they assist in providing accountability for various managers and department heads. They often become personal motivators re goals, compensation, etc.

Yes there are some ' dangers ' in budgets - expectations set too high, data and accounting inadequate - therefore poor budget quality , they might have no flexibility built in, they might not take into account external factors outside the company .

However, on balance, budgets, sophisticated, or basic, provide a solid method for business owners to monitor financial health and plan for future growth.

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Article Tags: budgets, forecasting



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