The Importance of Making Budgets & Managing your Expenses

• What is a budget?
• Why is budgeting important
• How does budgeting help you manage your expenses?

Does planning a company budget seem like a chore to you? Well, think again! Budgeting can be your secret to success. If there is one thing most companies could use more of, it is money. But, the reality is that good financial management is planning expenses with what you have. Budgeting helps you stretch your money and to spend where it is needed the most.

Bank loans and investors are excellent sources of money. But, how do you make your capital do more? The answer is ‘Budgeting’! Budgets sound more complicated than they are. In their simplest form, budgets are a spending plan, and they work better when companies stick to them. Budgeting is not a way to spend less. It is a way to spend better.

Readily available credit is a tempting option to bridge the cash deficit. But credit can add to your monthly burden. If you are a business owner, unexpected expenses can give you sleepless nights and push you over the edge of financial stability. Plan your spending so that you are disciplined and prepared for ups and downs in the market.  If you have a debt burden, cut down on spending and pay towards reducing debts.

What is a budget?

A budget estimates how much money you expect to make and how much money you plan to spend. You can make a weekly, monthly or annual budget. Often businesses use accounting software to take the guesswork out of budgeting. You can view the actual income and spending in previous years for the corresponding season or month.

The intelligent planning of a budget requires that you list the constant expenses such as rent, utilities, insurance, debt repayment installments, and payroll. The other variable expenditures are then listed, most often as approximations. The next step in budgeting is to estimate the likely expenses. This can be quickly done by studying the expenses in the same time period in previous years. A single budget plan is sufficient for a small to medium business, and a larger business would require multiple budgets that address the various aspects of the business. The types of budgets in such a company would be:

What are the types of budgets?

Master budget: This is the budget overview that addresses the titles that would usually feature on the annual financial reports. It gives a summarized overview of what the company plans to earn and spend and a balance sheet-like budget plan.

Static budget: This is the budget for expenses that are usually a constant that will not change unless one renegotiates utility costs or attempts to reduce usage.  In huge companies, this may be divided into smaller budgets for each company location or department.

Operating budget: This budget addresses the expenses incurred for day-to-day operations of the company and includes the items that contribute to the COGS (Cost Of Goods Sold). It details the costing plan for materials and services used for production and does not include items such as debt and capital. It also sets an estimate of the revenues that will be generated.

Cash flow budget: The planning and management of the cash flow into and out of the company is essential for financial budgeting. A company would estimate the amount of revenue generated and how it will be spent.

Companies can also make smaller budget allocations for different departments, and the department heads would then plan a budget for the allocated amount.

Why is budgeting important?- Advantages

So, what is budget planning? A budget is simply a spending plan within the available money. Whether you are a small or large business, budgeting is a way to gain control over your finances. When you sit down to make your budget, first address the fixed expenses. Then consider the new projects, expansion plans, product development ideas, and other potential costs. Consider which of them you can execute with the available funds. Favor the projects that have more potential for return on the money spent.

A larger company can use budgeting to ensure that the available funds are properly allocated to the different activities and departments in the company. It also helps set targets for each department and the whole company. Operating within a budget ensures no overspending that could impact the company’s bottom line.

How does budgeting help you manage your expenses?

Budgeting keeps you on track for your financial goals

Budgeting helps you convert your plans into achievable goals. When you plan your revenues and expenses you are also setting revenue goals. Instead of looking back at your financial year and realizing that you were busy all year but did not make a big profit, you plan to generate a profit.  A budget helps you determine just how much you must earn to spend and still make a profit. Your budget helps keep you on track to achieving sales, marketing, turnover, and profit goals.

Budgeting keeps you from feeling financially overburdened

Money is one of the primary necessities for a company’s growth. Budget your company’s expenses so that you have some money left to invest in the company’s growth. Even if you do not manage to accumulate the entire amount that you need, you can reduce the amount of debt that you will have to incur. Having a sensible budget and being able to meet obligations also makes your company more attractive to investors.

Planning your business goals and budgeting money to achieve them helps you feel more in control. The insecurity caused by financial burdens slowly eases into a determination to achieve.

Budgeting helps you avoid or get out of debt

Debt is all too easy a trap to fall into. A self-imposed spending limit should be a part of your company budget. Make it a part of the company culture to be thrifty and curtail wasteful expenses. Reduced spending and regular payments will help you get out of debt. Budgeting also helps you become more mindful of decisions to take on more debt.  If your business has an existing debt burden, allocate money to settle the debt.

When your company has a realistic budget and follows it strictly, it is attractive as a safe investment for investors. A company with a data-backed forecast and budget plan for the year can impress investors and easily raise capital. A financial institution would also be more likely to extend you a loan at more attractive terms.

Budgeting keeps you organized

Budgeting necessitates listing all your expenses. You get more organized by sitting and thinking out, and planning your expenditure. To save money, you start planning expenses and selecting vendors carefully. Instead of carrying unnecessary inventory, you can plan inventory spend more sensibly.

Think about how the market dynamics have changed and use past data to create a budget. Sounds complicated? It is not. Let us take an example of a seasonal holiday sale. Looking at the previous years’ data, you may see that the demand for your holiday items started going up two weeks in advance. You can also note which items get sold out towards the end of the sale every year. You can then plan your budget for this year with particular attention to the things that tend to sell well or get sold out.

Technology is instrumental in helping a company organize a budget. You can analyze trends and generate forecasts quickly and accurately. Business management software is an essential tool in making a realistic data-based budget.

Budgeting helps you prepare for emergencies

Market conditions are always unpredictable. A sudden natural calamity or political turmoil can wreak havoc on a company’s plans. Unexpected breakdown of machinery, sudden increases in taxes, delayed customer payments, and similar situations must be handled by a business.  If you put aside some money every month for emergencies, you will avoid difficult situations. Even if insurance is not mandatory in your country, buy insurance to be covered in case of a sudden expense.

Budgeting helps you save money

The most obvious benefit of budgeting is that it saves you money. Unplanned spending can be like a leak that drains the bucket. You plug the leak and start accumulating more money by planning your expenditure.

Paying off debts reduces the money that you pay as interest. By saving up and spending with thought, you may also invest in projects and products that give you a higher return on investment. Budgeting improves your finances and your stress levels! Stop losing sleep over looming bill payments. Instead of managing your business from month to month, budget your expenses to become more financially stable and capable of growth.

The simple answer to “What is budget?” is “A way to a more stable stress-free business management experience”! TallyPrime gives you the data and reports that you need to take your budget to the next level. Instead of guesswork and approximations, use TallyPrime’s analysis tools to create a complete and realistic budget for your company.

How TallyPrime Assists in Budgeting

A budget is a plan prepared for the flow of funds in an organisation. Budgets help you to refine goals and use funds efficiently. You may also observe the difference between an actual spending and income and a projected budget with the aid of a budget. The difference between the actual and budgeted amounts enables you to make well-informed decisions about how to boost income and reduce costs.

TallyPrime gives you the freedom to design budgets for ledgers, groups, and cost centers depending on your needs. You can create budgets for Ledger, Groups, and Cost Centers. You can Alter and Delete a budget. And, you can also view budget variance.

To create: Go to Gateway of Tally > Create > Budgets

To alter: Go to Gateway of Tally > Alter > Budgets

To delete: Go to Gateway of Tally > Alter > Budgets > Select Budget> Alt+D and press Y

Refer to know more: Create, Alter, and Delete Budgets in TallyPrime | TallyHelp 

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• What Your Small Business Needs Today and Tomorrow to Grow

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