Budget

What is a Budget?

A Budget is a financial document prepared by your management team to estimate your company’s revenue and expenditure for the upcoming financial year.

A budget is a comprehensive and itemized document with estimations of your company’s expenses and income. It is prepared annually and based on business objectives of your management team and is approved by your board.

It covers:

• Income: Expected revenue through sales of products or services, interest, dividends, royalties and capital gains
• Expenses: Expected costs; fixed costs (such as rent and insurance premium) and variable costs (such as salaries, utilities and phone bills, marketing and administrative costs)
• Profit or Loss: Expected profits or losses for your company after accounting for income and expenses
• Cash Flow: Expected cash flow sources and estimation to assess if your company has sufficient funding to support the projected net cashflow impact of the coming year

Why is a Budget important for business today?

A budget document enables your company to:

• Impose fiscal discipline on the business by ensuring material additional costs not budgeted for can only be incurred following an approval process
• Track your monthly results against budget and to take immediate corrective action where results deviate substantially
• Determine the resources required by your company to meet its business objectives
• Communicate the planned expenses and expected revenue to your internal stakeholders and employees
• Analyze the deviations in your projected budget and actual budget and assess the reasons behind them
• Formulate strategies to achieve your budgeted targets
• Establish a basis for internal audit to evaluate results of each department on a regular basis

Why is it important for an event tomorrow?

A budget document is important for an event tomorrow, as it helps:

• To demonstrate the management team’s discipline in conducting robust budgeting processes
• Investors to understand how the business has performed relative to budget in the past
• Investors to understand, in detail, where the current funding is being allocated for the current or upcoming financial year
• Investors to assess the underlying assumptions made by your management team to prepare your budget and evaluate their rationality

Pros of addressing Budgets

• Imposes fiscal discipline on the business
• Exposes the funding requirements of the business for the coming year
• Demonstrates management’s ability to forecast revenue and expenditure
• Facilitates tracking of costs against budget to flag issues for investigation
• Demonstrates to investors the historical performance of the business against budget
• Demonstrates to investors the detailed allocation of funding
• Demonstrates to investors the methodology used to predict revenue and expenses

Cons of not addressing this topic

• Increased potential for cost overruns throughout the year
• More difficult for investors to understand where funds will be spent