Importance of Management’s Budget
Budgeting is not really something that should be discussed, but rather something that every company should be using in order to properly evaluate its financial possibilities, as well as to plan ahead the company’s financial spending and investments, corroborated with any financial liabilities.
As analysts have pointed out, “a budget is simply (1) a tool to increase your consciousness of how and where you spend your money and (2) a guideline to help you spend your money on the things that are most important to you”1. These two components of a budgeting definition should be showing us why budgeting is so important and why everyone should be opting for it.
So, budgeting greatly helps with two different components. One of them is the fact that it shows where the money is actually going. In other words, the company using a budgeting tool will know exactly the expenses it has assumed, as well as any investments it has committed to during a certain period of time.
Further more, the budgeting tool is essential in determine projects which are actually essential for the company, in other words, projects which bring added value to the company. The logic behind this is quite simple: after determining how much you are actually willing to spend during an investment or financial period, you need to decide what you want to spend the money on. Budgeting helps here as well and, additionally, it shows you how you can actually carry out the other projects which do not fit on the initial list.
Budgeting should be considered a long-term strategy, with all the implications this brings about. In this sense, we should point out towards the fact that budgeting shows a concern for the long-term evolution of the company, with the top management needing to consider in the budgeting scheme not only the present projects and those that may appear as a necessity in the short run, but also projects with a medium and long term implication, projects that could bring significant revenues in the future, but who need to be included into present budgeting schemes.
Nevertheless, we may consider some of the negative implications that budgeting could bring about in the company. One of these refers to any long-term projects, where the initial evaluation did not lead to the expected result. We may have, in this sense, projects that have been included in budgeting schemes, projects for which money have been allocated and which, in time, do not achieve the expected results and returns. One may actually point out towards the fact that if these projects had been dealt with at their specific time, they would have probably been evaluated to their true potential.
While such an evaluation may be true, this does not deny the fact that a large proportion of projects that have been included for the budgeting evaluation will have resulted in good returns for the company. Additionally, project which are not successful do not necessarily reflect a bad budgeting strategy, so they should not be considered an evaluation tool.
Overall, we may point out towards the fact that a proper and well-worked budgeting strategy is bound to bring about a healthy and successful financial situation within the company. Further more, a budgeting policy will have reverberations among the overall strategy that the company is determined to apply.