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  • Writer's pictureMy Finance Partner

4 Benefits of Budgeting for Business

Carefully planning and managing financial performance by developing a budgeting process is an effective way to keep your company's finances on track.

Business Planning and Intelligence

Your business budget reflects your forecasted business and operational plans to achieve a specific financial goal. Include your value extraction plan for the year. All businesses should incorporate value extraction (the return for the owners/partners) into their business model and should consider opportunity and risks. With a comprehensive business plan, you get to understand your business better. A budget creates a framework or baseline to measure against and should be your ambitious but realistic estimate.

Risk & Opportunity Management

Identify when your plans are going off track and figure out why. It mitigates risks of wasteful or unnecessary spending. Keep a register of opportunities and likelihoods. Keep focussed on the main goal and keep emotional decision-making in check. You learn from your current knowledge and your mistakes. Evaluation of the variation against budget enables investors to identify risks earlier and to estimate the impact on expected return.

Resource allocation & management

Once you have a budget, getting to the cash flow forecast is relatively simple. It will identify problem areas early to get funding. The Sales and volume budget will help determine, for example, capacity constraints if you are a manufacturer and staffing constraints if you are in services. If you are seeking funding for growth, the bank is very likely to ask for your forecasts, and it pays to be accurate as they will stress test them.

Planning and Priority list

Capital allocation is one of the biggest drivers of value creation or destruction. Capital allocation refers to the investment of a company's financial resources to particular assets, projects or business lines. In order to maximize efficiency and profits, you need a system to evaluate and rank these. There is a volume of research and material on Capital Allocation, and I would add your time to this list. This is true for any entrepreneur. We can apply this principle on a project-by-project basis within a business for those with multiple companies.

Finally, budgets can help business owners and their teams make good decisions to maximize total return. Budgets also help employees at all levels understand the company's goals.

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