Any financial expert or successful businessman will confirm that a company must have a budget. And this is not a whim of particularly demanding leaders but a vital necessity. Some owners believe earning a lot is the main thing for the company’s success. Given the unstable economic situation, this issue is irrelevant due to the high competition in almost all areas. The insufficiency of natural financial resources, primarily cash, can pose severe problems for the oil company due to the inability to ensure the repayment of urgent financial obligations (loans, taxes, wages, and duties to life-supporting creditors). This can lead to dire consequences and, in the worst case, to financial bankruptcy or the company’s collapse. However, how and where to spend money is a secondary issue. However, this is a fundamentally wrong approach because budgeting is not just dull numbers but a natural mechanism for achieving your goals. With the help of a well-designed budget, you can successfully grow your business and stay ahead of competitors.
Benefits of Budgeting
Budgeting is not a waste of company resources but a beneficial thing. Evidence of this is the apparent benefits of budgeting—the ability to set specific goals by controlling financial flows. A budget is an opportunity to develop a clear purpose for yourself and your business, such as earning an N-amount of money for the reporting period. Setting and achieving goals is an effective way to develop a company. The main thing is to set realistic and achievable goals. At the same time, with the help of the budget, you can determine how much money will be spent to achieve a particular purpose. Budgeting is one of the most prominent and straightforward ways to understand a specific business’s success. It is easier to analyze the company’s activities. The manager may ignore apparent mistakes in the work and not notice the company losing profits.
Unnecessary costs and a cash gap can be avoided. But if a budget is drawn up, it is immediately clear where the money comes from, what it is spent on, what items of expenditure are optional, and so on. In addition, the budget helps track the margin and cost of projects, which will help reduce costs. After receiving income, managers often want to immediately put this money into circulation, spending it, for example, on a corporate party, buying new equipment, improving working conditions in the office, and other things. However, if there is a budget with all the planned expenses, it is very disciplined and does not allow spending money on unnecessary items.
Successful Budgeting System in a Company
To create and successfully operate a budgeting system in a company, the following must be completed:
Administrative prerequisites
The readiness of top-level managers to manage the company within the framework of the budgeting system, which defines the highest goals and principles, requires the management apparatus to observe strict budgetary discipline;
Organizational prerequisites
The management bodies that form the budgetary and organizational systems must actively interact, support, and correct each other to achieve the corporate goals of the company;
Information prerequisites
The most important prerequisites for creating an effective budgeting system include the formation of a system of budgetary powers and responsibilities, an appropriate system for limiting and distributing resources, a system of plans, as well as a system of financial accounting and control, which are, respectively, informational and organizational supporting parts of the budgetary process of an oil company. The availability of practical tools for collecting, storing, processing, and transmitting planning and budget information include developed management and financial accounting systems, a developed forecasting and analytical system, an influential computer data processing system, etc. It should be emphasized that the introduction of budgeting is not a one-time act and should be carried out gradually, in successive stages, each of which determines the formation and activation of a specific part of the company’s unified budgeting system.
Are There Any Disadvantages?
The main drawback is that correctly preparing the company’s budget is hard work, which takes time and effort. Changes happen constantly, so it’s impossible to make a budget once and copy it all the time. The second disadvantage is that employees will have more worries and paperwork, and not everyone will be happy with such a turn.
Budget Cycle
The budget cycle consists of three stages: planning, control, and analysis. In the first stage, a budget is planned, which should reflect the actual state of affairs of the company. Numbers should not be taken from the ceiling. All income and expense items are controlled and recorded in the second stage. At the final stage, an analysis is carried out, which allows you to identify errors and weaknesses in the company’s work and understand its strengths. A thoughtful analysis is fundamental to the company’s development, and its revenues only grow.
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