The budget is a critical planning tool for an organization. When developing a budget, it is important to be as concrete and specific as possible about future income and expenditure. The budget must consider direct and indirect costs and enable the organization to allocate and plan for the coming year. Budgets are prepared before the start of the fiscal year, so unknown factors need to be predicted. Budget analysts review historical trends as well as make assumptions about upcoming expenses to try and accurately predict the organization's financial situation for the year ahead.
Budget predictions are impacted when actual revenue received is not as much as originally anticipated. External factors negatively affecting assumed revenue might include an economic downturn, unexpected competition causing lowered sales or an inability to sustain the level of growth needed. Internal factors such as inadequate collections and poor accounts receivable practices could also impact revenue. Aggressive projections that assume a high rate of growth or increased revenue have a much greater potential for inaccuracy than conservative estimates based on data from previous years.
Expenditure may be one of the most difficult areas of the budget to predict. Increases to health insurance, turnover levels and collective bargaining in unionized organizations can all change salary and benefits by a significant margin. In many industries, salary and benefits is more than 50 percent of the organization's total expenses. Any variance to employee compensation will have a noticeable impact on budget predictions. Other unanticipated expenditures may include rent increases, a previously unforeseen need for overtime and financial audit fees and fines.
The economy and current market conditions can impact the financial forecast in several ways. Changes to the inflation rate and stock market conditions directly affect the organization's net worth and its ability to generate funds or loans. If the company relies heavily on investments as a funding vehicle, then poor stock market performance will have a direct, negative effect on budget predictions. Likewise, if the rate of return on investments outperforms the prediction, then the budget will have a surplus.
Certain legislative changes have a direct impact on budget projections. In most cases, businesses will be aware of pending legislation before it takes effect and can plan accordingly. Sometimes, just the introduction of future legislation, even if it has not taken effect, will disrupt current budget projections. An example of this was the introduction of Governmental Accounting Standards Board (GASB) legislation related to retirement and other postemployment benefits. Although the legislation did not take effect immediately, the impact of the future legislation was clear. It immediately revealed that local governments would have millions of dollars of unfunded liability under some of the proposed rules. Consequently, the organizations' bond ratings started to take into account the potential liability and some were downgraded as a result, hampering ability to borrow money and directly impacting cash flow. Another example of an immediate legislative change that impacts budget forecasts is a change to taxation.
- Photo Credit dollars sign flying image by Pei Ling Hoo from Fotolia.com
Factors Affecting Sales Budgeting
When analysts attempt to budget sales, they rely on many different data sets to determine the best way to allocate financial resources....
Internal Economic Factors
Internal & External Factors That Influence Employee Behavior. ... Factors Affecting Budget Predictions. The budget is a critical planning tool for an...
What Are the Factors for Preparing a Budget?
Factors That Affect an Advertising Budget. Whether you're selling a product or service to a select group of consumers, creating a marketing...
Internal Factors of Marketing Plans
... it is important to consider the internal factors that will affect your campaigns and ... How to Develop a Marketing Plan...
Factors That Affect an Advertising Budget
Whether you're selling a product or service to a select group of consumers, creating a marketing plan helps outline how you will...
What Factors Contribute to Budgeting Success?
Budget Factors That Affect Inventory. In order to maintain an inventory system that allows you to satisfy customer needs while staying within...
Factors to Consider in Planning Family Needs
Factors to Consider in Planning ... so maintaining records and future planning should become more ... planning for the birthday may be...
Internal & External Factors of Consumer Behaviour
Internal & External Factors of Consumer Behaviour. ... What Are Internal & External Environmental Factors That Affect Business? Role of Perception in...
External Factors of a Marketing Strategy
There are a number of external factors that can affect a company's ... The state of the economy can have a major...
Fuel Prices Affecting Family Budgets
Typical Budget for a Family of Four. It is often said that life changes when you have a family to raise and...
Factors Affecting Sales Performance
Factors Affecting Sales Performance. ... The employees' skill levels are an internal factor that affects the management style of a ... Factors...