A budgeting process is essential to achieving financial objectives. A budget is basically a financial strategy for a specified period, usually one year to five years. It can also comprise future projected revenues and sales, fixed costs and expenses, resources, liabilities and funds flows. In contrast to the popular belief that budgeting is an area of meticulousness where nothing can be left out, it actually involves very little activity on the part of the person who makes the budget. In fact, budgeting is a lot like playing a game. One doesn’t have to be great at playing baseball in order to hit a home run or create an accurate shot; all that is required is the right attitude and the ability to manage the financial aspects of a situation.
There are a number of questions that need to be answered before undertaking a serious budgeting effort: What are my business goals? What are my competing goals? What are my short-term and long-term spending requirements? How do I measure short-term spending needs against long-term goals? How should I allocate resources between competing goals?
Traditional budgeting is done by outlining the financial requirements for a period (typically one year), creating a balanced budget, and determining the level of expenditure based on those requirements. Budgets are then balanced against future goals, eliminating potential problems by anticipating (and providing incentives for) the type of activity that will bring in revenues. In practice, this means that budgets are almost always activity-based, with significant deviations from the balance due to special cases, unexpected expenses and exceptional circumstances. For example, most businesses incur some sort of travel expense, and this is considered an activity-based expense.
Many businesses decide to try a financing solution to get ahead of this problem. Instead of creating a detailed budget plan, they choose a lending or borrowing activity to take care of financing needs. In effect, they turn their budgeting function into a lending or borrowing activity itself! This isn’t ideal, since the business risks becoming stuck in a debt cycle that may not have any obvious exit. Moreover, a traditional budget isn’t flexible enough to take advantage of changing financial circumstances.
The good news is that there are solutions to solve the financial problems associated with traditional budgets. Budgeting software, budgeting tools, and other online financial management products can help businesses create and manage effective, flexible budgets. In addition, some businesses use online finance management solutions to save money on expenses and reduce their overall debt load.
When businesses have a clear idea of their expenses and future financial obligations, they can more effectively allocate available resources to meet those needs. By using an innovative budgeting tool, they can create a budget that is both flexible and comprehensive. By making the process of budgeting easier, the upfront costs can be significantly reduced.