Chapter 14

Budgeting

IN THIS CHAPTER

Planning and budgeting

Defining the benefits of budgeting

Budgeting profit and cash flow

Seeing additional reasons for budgeting

Determining whether full-scale budgeting is worth it

A business can’t open its doors each day without having a pretty good idea of what to expect. And it can’t close its doors at the end of the day not knowing what happened. Recall the Boy Scouts’ motto: “Be prepared.” A business should follow that dictum: It should plan and be prepared for its future, and it should control its actual performance to reach its financial goals.

Business managers can wait for results to be reported to them on a “look back” basis and then wing it from there. Or they can look ahead and carefully plan profit, cash flows, and financial condition to chart the course of the business into the future. Budgeting is a tool of financial planning and control. The business entity’s accountants pull the company’s planning details all together and prepare budgeted financial statements, against which actual performance is compared. Importantly, a budget provides benchmarks for evaluating performance.

Keep in mind that budgeting costs time and money. The business manager should put the company’s budgeting to the costs-versus-benefits test. Frankly, budgeting may not earn its keep and could actually cause serious problems that contradict the very reasons for doing it.

Budgeting offers important benefits, but a business may decide not to go to the effort ...

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