Sometimes it seems so fruitless, doesn’t it? We don’t know what’s going to happen tomorrow, let alone in 1-3 years’ time. I don’t think any of us has a crystal ball to enable us to see into the future (thankfully – can you imagine how dull that would be?!!).
So why do we attempt to budget at all?
Opportunities for the business
Done properly, the annual planning and budgeting process is a fantastic opportunity to explore the full potential of a business.
How can the company beat its performance last year? How can it stay ahead of its competitors? What truly are its most profitable revenue streams? Where can cost improvements be made? What new opportunities are there in the market place – new customers, new products or services, new technologies that could be exploited, etc.?
Focus & Direction
Organisations need to aim for something specific otherwise they would all be headless chickens spinning in a gazillion different directions.
Once the company knows what it’s aiming for and knows its purpose, it can focus all its resources in achieving these aims.
Budgets help companies identify all the resources at its disposal and any new ones that need to be added. These resources then need to be co-ordinated to ensure the company can achieve its objectives and budget. Resources include people, time and assets, etc.
Budgets help entities to control how their resources are used and what monies are spent in which areas. Without the budget and annual plan as guidance, efforts could be directed into completely the wrong areas.
The budget helps to assist decisions in the business throughout the year. A budget, however, should not be so rigid and restrictive that exciting new opportunities can’t be explored. A business case and re-forecast is a great way of understanding the potential of new opportunities even if they are not included in the budget. The world moves quickly and companies need to be able to respond accordingly regardless of whether it’s in the budget or not.
Ultimately, if the People know what the budget is and the Purpose of what needs to be achieved, the company Performance will follow (3 Ps).
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