Benefit from budgeting now

As a company grows and transactions increase in number and complexity, it makes good sense to prepare a budgetâ???a detailed plan showing how resources will b e used during a given period of time, usually a year. What are the benefits of budgeting? First, it encourages the manager to think systematically and plan for the futur e. Running a business entails more than just dealing with day-to-day operations . One has to ensure that the business remains viable and sustainable. Therefore , knowing what and where certain business endeavors should be accomplished is k ey. Second, a budget helps the manager decide how to allocate the business' scarce resources. For instance, if excess cash was available and the manager is choosi ng between paying off high-interest loans or investing in additional inventory to increase revenues, he may project budgets for both scenarios and pursue whic hever option has a more positive effect on the bottom line. Third, a budget provides standards for evaluating performance. Targets are comp ared with actual results and differences or variances between the two are ident ified and analyzed so that the company can take corrective action. For example, if actual sales were significantly below the budgeted level, the manager is al erted to study the possible reasons for the shortfall. Fourth, a budget, especially in its preparation, âforcesâ?? company personnel w ith different responsibilities to work together toward achieving common goals. The salespeople might aim for increased sales, for instance, which may involve a related increase in manpower. On the other hand, the human resource people mi ght be aiming for lower costs through a hiring freeze. The budget will then hav e the effect of unifying these seemingly opposing goals so that, in the end, th ese company personnel find a way to achieve whatever is agreed upon to be the b est for the company. Moreover, a budget serves as a communications tool to exchange information abou t the company's goals as well as achievements. It also creates awareness among company personnel on how each activity contributes to the company's overall per formance. Finally, a budget, if used properly, provides the manager the motivation to wor k harder to achieve the projected results.