A budget is a financial tool to implement business stratagy. It is a *quantiative* description of management’s proposed plan of action over a specific period of time. So, other than helping count pennies, what are budgets for? They help you to plan for and review the big picture.
The classic use of budgets in large companies
The budget is usually created in the upper levels of management, often with the Board of Directors giving input on larger goals. The budget helps explain senior management’s business plan to the staff and gives each department their goals for the year. How they execute the plan to reach the goals is an internal management decision made by each department.
So what does this mean for my small business?
Even if you are a single person business, going through the process of outlining a budget is a great business planning tool. A budget creates quantitative “benchmarks” for the original plan of action. Did you meet them? Exceed them? If you failed to meet them – what was the cause? Was your plan too ambitious? Or did you not take into account important factors that affected your results?
Taking time to stop and think about why you exceeded or missed your goals is an important learning experience. Smaller organizations tend to be so caught in in managing daily crisis they often view long-term planning as a time-waster or a luxury. However, the annual budgeting process is a great time to pause, reflect and review.