Step-By-Step Guide to Create a Financial Budgeting
When it comes to the basic interests of a business or company to function successfully, we cannot ignore financial budgeting, which we can consider as the expression of the organization’s operating plan for a given period.
In all companies, regardless of industry, sector, or size, each year CEOs and their executive and/or management teams develop detailed plans that reflect what they are trying to accomplish over a given period.
Three concepts: income, expenses, and net income. In short, financial budgeting gives the company certainty about the path it must follow to achieve profitability and what it must achieve along the way.
Characteristics of Financial Budgeting
Although a budget is a document whose main purpose is to determine in advance various expenses and income for a specific case or department. These are some characteristics to take into account:
- Duration. The general practice is that the duration of any financial budgeting, with few exceptions, is 1 year.
- Objectives. The objective of the budget is to achieve control and objectives at the end of the year. This based on the forecasts of expenses and income, and the set of expected financial needs.
- Disciplines to consider. All aspects of finance can be covered, be it tax, finance, and cash flow.
- Responsible department. Normally the responsible department is the administration and accounting department.
- Typology. the budget is short-term, private, flexible, and follows the estimation methodology.
Given the above characteristics, it is safe to say that financial budgeting is an essential part of a company’s strategic planning, as well as the areas of marketing and human resources (HR).
Prepare An Action Plan
It can be said that before beginning to formulate a financial budgeting plan for a company, we must first formulate a general plan of action so that the entire organization can achieve the goal with specific actions. We recommend that this action plan include three main points:
- Financial goals
Financial objectives are goals set to achieve business goals that involve good money management and planning. If the organization is capable of setting realistic and measurable goals, it is capable of establishing (without fear of being wrong) realistic goals that are achievable. And when these goals are achieved, they create sufficient motivation in the work group to achieve them. This objective is always related to the net profit that the company wants to achieve in a certain period of time.
- Analysis of previous years
It is always necessary to review and analyze the income and expenses of the previous year – the ERP in the cloud can provide very detailed information – to make more accurate forecasts.
- Set spending limits
It is very important to determine the percentage of revenue in each category. This is the only way to ensure the safety of resources and spend less than you earn. Additionally, defining expenses provides a more complete picture of where income is going.
Projecting Sales
Once a general business plan has been established so that everyone knows where they are going, it is possible to predict the number of sales or revenue that the business will achieve over a period of time.
To achieve this, factors such as the estimated market demand for said products or services, the behavior of the target market, the degree of competition (direct or indirect), the average market price of the product or service, as well as the own production capacities must be taken into account.
Taking these factors into account and delving into historical data (knowing sales volumes from previous years and analyzing trends, which can be done with tools like ERP in the cloud) or considering consumer trending markets are factors critical to budget success.
Budgeting Expenses and Controlling Cash Flow
Just as it is important to forecast and control sales, expenses (fixed or variable costs) allow you to control and monitor investments made or cash outflows.
By planning expenses in advance, you can avoid unexpected expenses, better manage financial budgets, and use company resources more efficiently.
In addition to using tools like an ERP program to help you plan your expenses correctly, it’s important to keep the following in mind.
- Basic expenses
This category includes «fixed costs» such as water, electricity, salaries, etc. There are also «variable expenses» such as selling costs and administrative costs. By trying to determine spending for each area or department of your business or organization, you get a more complete picture of who spent what so you can more accurately take corrective action.
- Incidental expenses
Unforeseen events cannot always be ruled out, and when they do occur, they can often turn organizations upside down, especially if left unaccounted for. We recommend that you always set aside a certain amount for such expenses so that they create less stress on your entire organization.
For proper financial management, cash flow forecasting is a critical task to keep balances close to the capital requirements necessary for normal business operations. Accurate traffic predictions will prevent breaches of organizational commitments.
Structure Financial Budgeting Regionally and Periodically Review It
Just as we emphasize the need for a global action plan, each area or department of the company also needs a separate budget to make control and monitoring easier and more effective.
What are the advantages of each region having its own budget? A general purpose. When employees are required to achieve specific goals, it creates greater motivation and challenges for employees, as well as greater responsibility, which strengthens the entire organizational structure.
As in all areas of business life, this is true: those who do not value results are doomed to slow down their growth. With tools like an ERP program, regularly reviewing your planned financial budgets can help you not only correct financial mistakes (figure out why you’re spending more than you earn) but also repeat financial strategies that are working well.
Cloud ERP software is defined as an enterprise resource planning system that helps run a company, or business more efficiently, regardless of its size.
A cloud ERP program includes various information systems and provides a function to manage and monitor the company. As it collects data such as finance, inventory, sales, and personnel, and then centrally processes this data and delivers it to the management team of the company.
The wonderful thing about this cloud ERP system is that it can be accessed over the internet, as all the computing resources it runs on are stored in a remote hub, allowing customers to connect from any device they want.
Acting, Repeating, and Mending
Scheduling regular reviews to run a well-run business, always trying to increase profits without compromising the quality of products or services, is a useful and necessary task that can lead to timely action. It’s time to iterate on proven strategies and fix potential mistakes that may be holding your organization back.
For the company to achieve the expected goals, it is very important to prepare a budget in which the profits, costs, and achievable income are distributed.
A realistic and conscientious budget measures the opportunities for development and growth of the company over a certain period of time. It knows how much money is needed to meet the needs of the company, determines rates and costs, and thus facilitates the allocation of resources.
With these financial forecasts you can predict the future of your business, which is very important because it allows you to optimize your money, thus improving management and ensuring that your business remains profitable.
Budgeting does not require accounting management software; it can be easily created in an Excel spreadsheet or other spreadsheet programs. But if you want you can use an ERP service in the cloud, with which you can generate more reliable information.
Importance of Developing Financial Budgeting
Financial budgeting is the most important tool that allows people to know how much they earn and spend at any given time, and how much of their savings they can allocate. Its purpose is to prevent and correct financial errors.
The key to good financial health is organization, which is why the budget is so important. To do this, you just need to know the total value of your income and how much you spend in a given period. Saving is an essential part of financial health, but it is a reality that does not happen overnight.
It is an objective achieved through daily habits such as controlling and taking care of your expenses, creating simple budgets, customizing contracting services, conscious consumption. And mobility that will allow you to discover that the magic is not in how much you earn, but depends on how you manage your money.
Therefore, start saving, even if the amount assigned in your financial budgeting is small.
It is also important to recognize the following:
- If you earn more than you spend, the surplus is a great opportunity to save.
- If the profit is not enough to cover the expenses, it is worth starting to identify the luxuries that can be avoided.
To learn more about financial budgeting and how to create a successful budgeting plan, visit Noticias Diarias 24