“A budget is telling your money where to go, instead of wondering where it went.” – John Maxwell
A budget report is a quantitative business plan prepared by management for the next quarter, year, or even several years. A budget report usually works as a spending forecast. This is a typical practice for businesses that know their goals for the future periods and want to have a detailed plan to reach these goals as well as be able to create a strategy to achieve their target sales, revenues, costs, and other indicators.
Depending on the type of activity of the enterprise, the budget reports may be different and have a different level of detail. Deep data analysis is more efficient if the reports are as detailed as possible. Each report is formed depending on certain business processes. For example, it can reflect business transactions characteristic of a particular functional area. They can be expressed in physical and monetary terms.
Budgeting is necessary for objective planning and accounting of income and expenses, analysis of deviations of actual indicators from those laid down in the budget report, effective cash flow management, distribution of responsibility between business divisions. As a result of budget report preparation, it becomes clear what profit the enterprise will receive when going one or the other road (producing more, cutting delivery costs, hiring more line workers, launching a new service, etc.).
In fact, the whole budgeting process is reduced to forecasting (planning) the financial result, which is calculated as the difference between the total amount of income and expenses. If the actual indicators differ significantly from the planned ones, managers of different levels make management decisions that lead to the achievement of planned goals.
Budgeting allows you to control the business processes. The budget, being an integral part of the plan, contributes to a clear and purposeful activity of the company, serves as the basis for assessing the implementation of the plan, which creates an objective basis for the activities of the organization as a whole and its divisions. The main benefits of the budget report include:
- Planning of activities to achieve the objectives of the company. Budgeting is based on clarifying and detailing strategic plans for a given budget period.
- Communication and coordination of various business units and activities. This type of function involves the connection and functioning of all employees and divisions as a whole to achieve the intended goals.
- Guidance for managers of all levels to achieve the tasks assigned to them.
- Control of current activities, ensuring planned standards. It is better to use budget data as a basis for assessing the implementation of the plan by divisions, projects, and so on, rather than reporting data from previous years.
- Improvement of the management’s effectiveness. Budgeting contributes to the detailed study of the activities of their departments and their role in the business as a whole.
Budgeting and Forecasting: Is There a Difference?
Budgeting and forecasting are two different activities that are not interchangeable. There is done with a specific purpose. A budget provides details on the expected future results. It is a definitive statement about the volume of sales and a business’s ability to produce a specific amount of goods as well as expected revenue and expenses. the goal of budgeting is to allocate all the resources a business has in the best possible way to reach the company’s goals.
Forecasting, on the other hand, serves as the basis for budgeting. These are predictions about future events that are likely to happen. The first step in forecasting the future of the company’s performance is the forecasting of future sales. Based on this figure, the company will be able to predict future expenses and make other forecasts. Thus, the sales forecast should be as accurate as possible.
When it comes to forecasting, the business uses its historical data, analysis of the market, and other statistics, and often turns for expert opinions. In contrast to the forecasts, the budget can be viewed as a detailed plan of where the organization plans to be at any given point and what it will take to reach that point. It serves as guidance for the management on all the activities of the company.
It is obvious that forecasting can never be completely accurate. However, as time passes by, the business acquires more data on the variable and trends that forecasts were based on. The forecasts are recalculated and budget reports are adjusted based on the updated forecasts and recent actual results. As you can see, forecasting complements budgeting. Both can be prepared for a short period of time, such as a quarter, or cover multiple years and provide a long-term outlook for the business.