Budget control is a fundamental tool in our company’s financial management. We must consider that preparing future budgets involves a high degree of uncertainty. This is why budgets are not created to see whether we are right or wrong with our predictions; in reality, we prepare them to quantify what we believe will happen in the future.
Thus, we can make decisions in time to try to influence our company’s future and make it more favorable.
Budget control also serves to see business evolution by comparing what was planned with what is real.
What do we need to prepare our budgets?
- Determine what our company’s objectives are.
- Specify what resources we have available to achieve those objectives (personnel, machinery, etc.)
What is the process for developing our annual budget?
This process involves compiling historical data, income and expense projections, and participation from different departments to ensure that the budget reflects the company’s reality.
We will begin with the sales budget, where we will detail annual sales by months and by products or services. For this, we can study sales from previous years, conduct market studies to understand the sector, customers, etc. It is a budget that is related to the commercial part of the company.
Next, we develop the following budgets:
- Product production budget: we will determine the number of units to be produced in a year.
- Consumption and purchase budget: based on the planned production, we must determine the expected consumption.
- Direct labor and other production costs budget: based on data from previous years, we determine direct labor needs in time.
- Structural costs budget: we estimate those costs that the business has recurrently, which would be fixed costs.
- Marketing expenses budget: commissions, transportation, etc.
Once the previous budgets are prepared, we would integrate them thus obtaining a provisional profit and loss statement. This way we would obtain an estimate of our company’s future results.
Once the budget is in motion, it is crucial to regularly monitor the results. This involves comparing actual expenses with budgeted ones and analyzing the variations that occur.
Budget control is essential for several reasons:
1. Financial planning
It allows companies to establish clear financial goals and define how to achieve them. A well-prepared budget acts as a map that guides the organization on its path to success.
2. Decision making
It provides valuable information that helps managers make informed decisions. By analyzing variations between the budget and actual results, areas that require attention can be identified and strategies can be adjusted accordingly.
3. Cost control
It facilitates expense tracking, which helps prevent significant deviations from the budget. This is crucial for maintaining profitability and avoiding financial problems.
4. Accountability
It promotes accountability within the organization. By assigning budgets to different departments or projects, a sense of responsibility is established in managers and employees, who must justify their expenses.
5. Performance evaluation
It allows evaluating the company’s financial performance. By comparing actual results with budgeted ones, trends and areas for improvement can be identified.
In summary, budget control is a fundamental tool in the financial management of any company, regardless of its size or sector. This process involves planning, executing and monitoring budgets, allowing organizations to maintain a balance between their income and expenses, as well as achieve their strategic objectives.
If you need help from an expert, you just have to request free consultations from the Economic Office of Galicia.
