Company Budget: How does it Work?

What is a company budget?

To understand where we spend our money, see opportunities to save, and plan savings, financially savvy people often plan their finances and keep track of what they spend. For exactly the same reasons, companies also need a budget plan. A budget is a business plan drawn up in monetary terms for a specific calendar period.

A budget is a business plan drawn up in monetary terms for a specific calendar period.

Why is it needed?

A budget helps companies understand costs and keep track of goals. Without budgeting, it is difficult to understand the impact of spending on the business. With just a plain profit and loss statement and balance sheet, it is often not enough to successfully understand and manage a company’s finances if they are not based on the company’s operating fundamentals.

What is its functionality?

Budget file

The budget file is linked to the reports of a company’s accounting system. The budget includes not only profit and loss statement, cash flow budget, and balance sheet forecast, but also financing, investment and depreciation schedules, motivation system, procurement plan, partner conditions, working capital forecast. This allows detailed forecasting of all revenues and costs by month and/or product groups or units, which form a structured approach to improving results.

 

Ability to quickly change key assumptions

One of the main features of the budget is the ability to quickly change the most important assumptions about external factors affecting the company’s development, which will be automatically reflected in all aspects of the financial plan. In this way, it is possible to quickly analyze different scenarios and adjust your action plan, depending on the situation.

Performance control

The budget file also includes a performance analysis model, which allows you to see whether the set goals and intentions for the year have been met, and allows you to better forecast the budget for the next year. The execution system is linked to the accounting system’s reports and budget file, which together show an analysis of the company’s performance against the budget.

 

How is it created?

Budgeting usually starts with setting business goals and quantifying them. Successful planning and budgeting require agreeing on basic settings or key assumptions that affect the entire operation of the business (eg, rising material prices, mark-ups, exchange rates, etc.). Once these preparations have been made, work can begin on creating the actual budget model – turnover, planning of various individual units (e.g., product lines, shops, countries), as well as planning of administrative costs. By merging or consolidating these main directions, a draft budget has been created, which still needs to be approved. Pending approval, it is common for the budget to be reviewed and improved during processing. An analysis of performance is then conducted, usually, a year or at least half a year afterward the creation of a budget, comparing the goals planned in the budget with the actual course of the company’s operations. In some cases, the budget may be adjusted in the middle of the year, based on performance analysis and new targets.

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