Budgeting is the process of making a budget or financial planning.
Budgeting can be done for corporate or personal financial planning. Usually the budget is determined at a certain time period periodically.
Budgeting function
The budgeting process also involves making a report on the estimated money that will enter (expected income) and exit (expected expenditures) from a company at a predetermined time frame. Budgeting is used to help companies see if they will be able to continue operating in the future.
Following are the specific budgeting functions:
Determine the initial capital. By determining the budget, we can know how much capital money will be used to run the business.
As a sales target. Budgeting can be a tool for comparing sales with expenses. If the revenue target is not within the budget, then something must be adjusted so that the business can run effectively.
Help control expenses. Without budgeting, a company can spend more than they can pay. A budget helps reduce the risk of going bankrupt because spending is limited.
Support the strategic plan of business development. For more, you can read about business plan proposals.
That way, budgeting can also be a tool to measure the development of a business. A good business must be able to achieve and even exceed the sales target in the budget, but with no more or less capital than the set budget.
Effective Tips in Budgeting
Here are some budgeting tips that you can apply to your business or company:
- Choose the appropriate budget preparation method
There are two types of budgeting methods, namely top-down budgeting and bottom-top budgeting:
Top-down budgeting means that the budget is determined by the highest leadership of the company and all divisions must follow the budget that has been set.
Bottom-top budgeting means that the budget is determined by each division, then summarized into one overall budget for the company.
This is usually adjusted back to each company. In fact, bottom-top budgeting provides flexibility for each division, so that employees are more motivated to build a business. However, at the same time top-down budgeting takes a shorter time, and the process is also easier.
- Divide the budgeting plan into several parts
A budget does not consist of just one thing, but various parts. Budgeting has at least 3 parts, namely variable costs (expenditures that can change every month), fixed costs (expenditures that are fixed every month, such as employee salaries and building rent bills), and also expected income (monthly income).
However, you can also divide them by the following categories:
Sales budget: The cost of the target product sales times the product price.
Stock & production budget: Represents the cost of capital for product production or purchase of raw materials.
Non-manufacturing cost budget: Product capital costs that are not related to production, such as marketing costs, company administrative costs, such as legal, audit, research and product development costs.
Overhead budget: Other costs related to the company, usually fixed, such as employee salaries, electricity bills, rental costs, and others.
Capital budget: Costs to help increase work productivity, such as improving computer systems, providing vehicles, facilities, and company equipment.
Cash budget: The cost of a liquid company that is used to manage cash flow. Cash budget is used to manage when cash comes in and out of company accounts.
You can also divide it into different sections according to company needs.
- Do research / evaluation
Before determining the budget, make sure your budget does research to compare whether the price you set in budgeting is realistic. In addition, you can also take a budget estimate from the results of the budgeting evaluation and the company’s performance in the previous period. - Compare the budget with the financial statements
In addition to making a budget, you also have to do financial reports over that time period. If there is a difference between the estimated budget and the original financial report, you have to readjust so that you can reach the target set in the budgeting again. - Re-evaluate for the next budgeting period
After the time period is over, you can re-evaluate the budget by comparing it with the financial statements. From here, you can analyze by looking at the amount of difference between the financial statements and the budget that has been determined. This comparison can be divided into the initial budget and you will get the variance number from the results of the financial statements. If the variance number is large, then your budgeting needs to be readjusted and find out more what causes the difference to be so big. - Prepare financial protection
Finally, you must prepare a backup plan for your financial stability. All businesses and everyone can experience financial risk. The right insurance plan can also protect you and your business from unexpected financial risks.
