The main idea of a budget is to allocate resources to achieve the company’s strategic goals. Furthermore, some companies also use their budget to keep costs under control, determine bonuses, and set sales targets. The strategic guidelines of the budget decide which expenses are valuable and necessary to achieve the goals. A budget is a management tool based on costs, revenues, prices, and quantities standards. Reality is compared with the norm, resulting in differences that we try to explain and after which we adjust—six benefits of working with a budget.
A Budget Gives You More Control
Most entrepreneurs make a budget at the start of their business, including their expected income and expenses. The budget is often part of the business plan. When applying for financing, the average entrepreneur makes several budgets (mandatory). Still, as soon as the funding goes through successfully, he no longer cares about it, and that’s a shame. We name six advantages of using a budget.
Know the financial feasibility of your plan
A budget is nothing more than calculating methods. It makes weak spots and risks visible. It is good to clarify what is and is not feasible in advance. You can set priorities based on this. Unquestioningly, steering towards an unattainable goal can cause you significant damage.
There is more chance of credit
Based on a well-thought-out plan, you can determine how much external financing you need and whether you can get it through the bank and an alternative financier. The bank and other financiers will require a (multi-year) budget before financing. With a budget, you show the lender what you will do with the borrowed money in advance. An entrepreneur who can demonstrate that he consciously manages his company with a budget shows that he is a good entrepreneur in whom financiers can have confidence. Good entrepreneurship is important because it is getting increasingly difficult to get credit.
Adjust in time
Although a budget is never (exactly) realized, it is better to try to achieve it. You can adjust where necessary by comparing the recognized figures with your budget every month. Sometimes, circumstances will force you to change the budget positively or negatively. If you consciously manage, you can often see possible problems coming early; you can make timely adjustments and thus prevent more significant issues.
Liquidity forecast and seasonal financing
Companies that need higher financing for a limited period of the year arrange a bank overdraft. It is expensive (now about 10 percent interest). Therefore, keeping this credit as low as possible is essential. Planning the income and expenditure (liquidity budget) in this period is necessary. You can use this to calculate how much seasonal credit is needed (limit). You can intervene quickly (exhort debtors, postpone payment of creditors) if reality deviates too much from the budget. It is also possible to request an extension of the credit in time if you have a liquidity forecast as a guideline.
Cost and budgeting
A budget provides insight into the costs a business incurs. Based on a budget, you, as an entrepreneur, can better determine which expenses are desired or necessary. With a budget, financial decisions can also be made more transparent. For example, when determining budgets.
Determine the correct cost price
The market determines selling prices for products or services. A company makes a profit if its cost is less than its selling price. Therefore, controlling the cost price and keeping it as low as possible is essential. You can determine the price by adding direct costs (purchase and other direct costs) to any indirect costs and risks. The budget, which contains this information, is the basis for the cost price calculation and is essential for your business operations.
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