Budgeting as a Management Tool

TOPIC: BUDGET AS A MANAGEMENT CONTROL TOOL

There is a saying that “Creating a financial plan makes you control your business cash flow. Instead of it controlling you”

For many small business owners, the process of budgeting is limited to figuring out where to get the cash to meet next week’s payroll.

There are so many financial fires to put out in a given week that it’s hard to find the time to do any the time to do any short or long range financial planning. Failing to plan financially might mean planning to fail.

Business budgeting is one of the most powerful financial tools available to any business owner. Put simply, maintaining a good short and long range financial plan enables you to control your business.

The most effective financial budget includes both a short range month to month plan for at least a calendar year and a quarter to quarter long range plan you use for financial statement reporting. It should be prepared during the two months preceding the fiscal year to allow an ample time for sufficient information gathering.

The long range plan should cover a period of at least three years (some go up to 5 years) on a quarterly basis or even on annual basis. The long term budget should be updated when the short range plan is prepared.

What is a budget?

A budget is a financial and / or quantitative plan of operations for a forth-coming accounting period. It is a predetermined statement of management policy during a given period which provides a standard of comparison with the result actually achieved.

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Budget can also be defined as a plan quantified in monetary terms,

prepared and approved prior to a defined period of time, usually showing planned income to be generated and / or expenditure to be incurred during that period and the capital to be employed to attain a given objective – CIMA (CHARTERED INSTITUTE OF MANAGEMENT ACCOUNTANTS)

Types of budget...