Planning provides the overall venue and process for stating the direction and financial objectives of an organization. Most companies put together an annual plan that is part of the larger strategic plan of the company, usually covering three to five years. This is where the senior executives lay out their vision for what is possible.
There are so many questions about your business that can be answered by the budget process and a good budget model. Bottom line – a budget is a vital tool for your company’s success.
Quantifies Business Goals. To be sure, a budget is NOT a crystal ball; however, it can serve as a place to consolidate and quantify all of your planning ideas so that you can see the financial impact of all of those thoughts before you act on them.
Serves as a Roadmap. Not many folks use roadmaps anymore; now we rely mainly on GPS to get us where we want to go. Whichever you prefer, both provide you with the path to get from Point A to Point B. Similarly, a budget will serve as your financial roadmap for the year, with your annual business goals embedded in the details.
Mitigates Risk. As a result of your preparation, ongoing measurement and discipline to your budget, you should be making fewer READY-FIRE-AIM decisions for your business. You just need to calculate the cost and benefits of a potential opportunity before you make a decision. It is far better to make a mistake on paper than it is to implement a bad, and many times, costly decision.
Enables Faster Decision Making. It should go without saying that if you have the financial impact of your annual goals quantified, any decisions that you will contemplate over the course of the year will be much easier to evaluate. The reason – you have put much thought into your budget, and any opportunities that come along will utilize the budget as a basis for the decision.
Forecasts typically use actual performance data to project the remainder of the current year’s performance. Forecasts are focused on what is happening from a revenue and income statement perspective.
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