For a company to have financial health that allows it to make a profit and grow consistently, it is essential to apply financial management methods. Among the relevant resources is budget planning.
This tool helps managers understand the current situation of the organization and plan its financial future. For this reason, budget planning should be applied in any company, regardless of its size.
Want to understand what this concept is and why it is so important? Then continue reading and learn more about budget planning!
What is budget planning and how does it work?
To begin with, it is essential to know exactly what budget planning is and how it works. As you have seen, it is a business financial management tool that allows you to study, plan and monitor the organization’s financial results.
In this way, budget planning projects costs, revenues, expenses and investments for the coming months or years. Thus, it uses current financial data to forecast finances and prepare the company for the future.
In general, the tool works by visualizing different future scenarios — both optimistic and pessimistic. As a result, the company can prepare for the most diverse situations that may occur.
To this end, the manager must consider:
- fixed, variable and semi-variable expenses;
- taxes;
- operating costs;
- supplier costs;
- emergency reserve;
- debts;
- investments;
- seasonality of sales.
Why is budget planning so important for a company?
Once you understand what budget planning is and how it works, it is time to discover the importance of this tool. In practice, it serves to help entrepreneurs or company managers make better decisions.
Therefore, planning your budget is essential for organizing your finances and helping to maintain your company’s financial health. Through planning, you can have financial control over your business , understanding issues related to future income and expenses in the present.
In this way, it serves as a compass for the company’s management to have a direction for its actions. Thus, the organization can make decisions based on concrete data — and, consequently, make better choices.
In this sense, there is less risk of adopting unproductive strategies, making it possible to make better use of resources, reduce costs and plan investments. Therefore, by developing a good budget plan, the organization can develop and grow consistently.
On the other hand, by neglecting to use this tool, the company does not prepare for the future, making decisions with little or no basis. In other words, there is a greater risk of making choices that harm the business.
For example, if a manager takes out a loan with many installments without understanding the long-term revenue projections, he or she may not have the money to honor the contract. As a result, the organization may have debts that are difficult to pay.
On the other hand, if management considers that there will be periods in which available revenue tends to be reduced due to seasonal sales, it may find another more viable solution than a loan.
How to make a good budget planning?
As you have learned, good budget planning is essential for the financial health of a business. Therefore, it is necessary to learn how to prepare this document.
First, keep in mind that planning can vary depending on the sector and the company. For this reason, there is no standard formula for how this tool works. In fact, you need to adapt the resource to your company or each department.
Next, check out the step by step!
Learn how budget planning is composed
Initially, it is essential to learn the composition of a budget plan. In general, this document contains:
- sales planning;
- operating expense budget;
- production cost budget;
- payroll budget;
- projection of sales deductions;
- budget for investments.
Understand the company
To make good planning, it is necessary to understand the company, considering the structure, the current situation and the expectations for the future.
Among other factors, the following must be evaluated:
- the size of the business;
- degree of maturity of the company;
- monthly and annual billing;
- staff;
- current budget;
- where the business intends to go;
- what is necessary for the company to achieve its goals.
With this information, it is possible to understand the company’s financial conditions and carry out planning in line with reality. Furthermore, by evaluating more details of the business, management can consider the specific needs of the organization.
This way, it will be easier to apply the tool to meet your demands, defining which points need to be dedicated to greater effort.
Collect the data
The next step in budget planning is data collection. This step is important for preparing reports that are essential for management: projected income statement, cash flow projection and balance sheet projection.
Using these documents, it is possible to create various simulations to project future scenarios and make adjustments if necessary. For these reports to be reliable, it is important to have tools capable of generating data that is true to reality.
Define and track metrics
For budget planning to be successful, it is essential to define and monitor metrics. After all, indicators help you know whether the tool is generating positive results or whether it needs to be adjusted.
Financial indicators that can help monitor this planning include: cash flow, budget control, cash generation and net income. Therefore, be sure to monitor them when managing the company’s finances.