A budget sets goals and provides direction
If your business does not have a budget, you are driving with no lights on.
Creating a budget may sound like a lot of work, but it’s worth the effort. A solid budget defines the goals for your business and the framework for reaching them. At the same time, it streamlines decision-making.
“If there’s no budget in place, the management is taking a stab in the dark. When you create a budget and monitor it, there’s less room for guesswork,” says Mika Mertanen, Controller at Administer.
According to Mertanen, financial goals should be based on realistic assumptions of the company’s prospects.
The budget is a tool for assessing whether the company has sufficient assets during the review period. In other words, budgeting is synonymous with a plan for what the business wants to achieve and the resources or investments needed to achieve that plan.
“You should start with the big picture and make sure everybody shares the same assessment regarding strategy, current business situation and any factors affecting it,” Mertanen continues.
Ask for help from a financial management partner
Even enterprises sometimes lack visibility of all the factors that need to be taken into account in budgeting. Some companies even operate without a budget. This is where a professional financial management partner can step in – acting as a sparring partner or helping define the budget from start to finish.
“Among other things, an accounting service provider can ensure that the cost of credit and investments are taken into account and that the budget realistically reflects the company’s short and long-term goals.”
The size of the company and the scope of its business are crucial in budgeting. Start-ups, for example, operate on a faster cycle, and should accordingly plan and monitor their operations extensively on a monthly and quarterly basis. However, a well-established company might be happy with a less frequent and detailed budget.
Remember to monitor regularly
There’s a cascade of budgeting systems available. However, small companies can manage perfectly well with just a spreadsheet.
Electronic financial management enhances budget preparation and facilitates monitoring. Monitoring is a critical part of the whole process: the actual figures must be compared with the budgeted figures at regular intervals. According to Mertanen, a reasonable monitoring period is usually one month.
“This way, you stay in touch with the actual figures and the forecasts. Any deviations need to be analyzed carefully. Whenever necessary, actions must be taken to remedy or enhance the situation for the company to reach its defined goal.”
Mertanen points out that budgeting is not just a number-crunching exercise.
“It’s not enough to just type in the figures – you need to understand what’s behind them. A budget should give you a realistic picture of where your company is headed and where you want it to go.”
Key points to consider
- When setting up a budget, management should share the company’s long-term goals and the direction the company is headed to, also referred to as a vision. The budget lays the foundation for reaching that vision.
- Key personnel. Include key people and maintain an open budgeting process. Individuals responsible for business operations must be involved, and they need to be constantly aware of whether the company is on the right track, whether the assumptions about business development and the operational environment are correct and whether the parameters being monitored are appropriate.
- Follow-up. Keep monitoring the items used in the budget, such as euros, hours, kilometres or working time.
- Why and for whom? Remember that the budget is your tool for managing your company. It’s not intended for the finance department, even though the controller may use some elements of the budget for cash flow planning.