Businesses of all sizes share some of the same basic financial concerns and requirements. One of these is preparing a budget that compares expenses to earnings and allows owners and managers to plan for the future while learning valuable information about past performance. A budget gives a businesses a powerful tool in several key areas.
One of the most essential purposes a budget serves in a business is to help control costs. When owners can see exactly what they are spending their capital on, they can take effective steps to save money. For example, if annual budgets show that raw materials are costing a manufacturing business more and more money, the business can begin to look elsewhere for new suppliers. If a budget shows a disproportionate amount of money going toward payroll, then owners can look into cutting back the workforce or instituting a salary freeze.
Another area where budgets prove indispensable in business is planning for future spending. Every business needs to balance its near-term expenditures with savings and investments that it can use in the long term to expand or take advantage of special opportunities. Budgets note expenses for the time period they cover and allow a business to monitor its spending along with its earnings, making it easy to devote profits to future endeavors rather than spending them unnecessarily as they're earned.
Business budgets serve a very important practical purpose by helping accountants and auditors to compile financial reports. Some reports are for internal use within the business and others are made publicly available for regulators, industry analysts, stockholders and investors to learn about how the business spends its money and how much it earns. Financial reports attract new investors and help businesses maintain consistent goals over time. Data from budgets is a key aspect of sound accounting and reporting.
Budgets give businesses the means for evaluating the success of specific efforts and programs. For example, if the business decides to invest more of its capital into increased employee training, the budget will reflect the extra spending. However, if a future budget shows an even greater reduction in the cost of recovering from problems caused by employee errors, the training program and its costs will be justified. Likewise if a new form of spending fails to show positive bottom line results in future budgets, it will become a candidate for elimination from the budget, perhaps in favor of a new program with similar goals.