A budget helps a business owner plan to measure how effective the business is in reaching its strategic goals. A budget has three major goals:
- Planning
- Creating consistency within all aspects of the business
- Evaluating performance
Planning
A budget forces a business owner to plan ahead. A business with a plan of action is more likely to take action than one without a plan. In the planning process, the business could use historical data as a starting point for projecting future activities. While historical data should be used as a starting point, a business should always strive to grow beyond its past performance.
Some issues that should be evaluated during the budgeting process are:
- Product lines
- Location
- Market share
- Cost structure
- Financial leverage
- External conditions that could affect the business either positively or negatively
Consistency within all aspects of the business
A budget turns an operating plan into actionable numbers. In other words, it brings consistency to all areas of operations. For example, if you plan to start a new product line a budget will force you to examine where the cash is going to come from. A budget also forces the business owner to allocate resources to major expenditures. In short, a budget keeps a business owners from living in the clouds and planning for reality.
Evaluating performance
Once a budget has been established, there has to be a system to measure and record the results. On a quarterly basis, the results from the budgeting process should be evaluated to determine if things are going according to plan. For instance if a new product line was proposed in the budgeting process, then the review process should determine how successful the business was at meeting this goal.
In conclusion, a budget is important for planning for future growth. It allows for resource allocation and consistency within operations.