UNDERSTANDING BUDGETING
– Ark Kasa Global Insights

Budgeting is simple term is a plan of activities expressed in monetary terms. It involves proper allocation of funds over a specified period for a particular purpose. Individuals, couples, families, organizations, associations, businesses and nations prepare budgets. Budgets may be created for the entire company, each organizational unit, departments and units as well as for specific projects, activities and events.  From simple paperwork to complex budgeting systems and software’s, the goal is to always ensure efficiency in the allocation of resources and funds.

A budget is therefore a plan that outlines expected income and expenses over a period of time. Some components of budgets include revenue, expenses, assets, liabilities, expected sales volume, etc.

Most Small and Medium Enterprises (SMEs) are not as privileged to financial opportunities in comparison to larger, more-established companies and are more susceptible to the fast-changing business terrain. The need to budget therefore cannot be overemphasised. 

Budgets are essential in

1. Establishing priorities
2. Allocating the use of resources
3. Controlling income and expenditures
4. Forecasting future needs
5. Monitoring and evaluating performance
6. Motivating individuals and organizational units

BUDGETING BASICS

For SMEs, the notion of budgeting maybe overwhelming. However, these basic principles seek to simplify the entire process and improve the efficiency and effectiveness of the business.

• Ensure separation of business finances from personal finances: Most entrepreneurs fall victim to this as they tend to co-mingle business and personal money. This could however have adverse effects. Business expenditure and inflows should be separated and recorded from the business owner’s personal funds.

• List all expenses: Track all business expenses, daily, weekly, monthly, quarterly and annually. List out all expenses – rent, salaries, supplies, services, purchases, maintenance/ repairs, etc.

• Be aware of your Business Income:  Record keeping of transactions, revenue and expenditure helps the entrepreneur know what to expect and what comes in as profit. It is important to be aware of the Business income in order not to overspend. Some SME owners in the quest to grow their businesses take decisions that is way above the spending budget. Such over zealousness could cost the company’s finance. Having a fair knowledge of what comes in greatly aids in prudent allocation of funds.  Being realistic is key.

• Have a Savings Goal for Expansion:  Businesses are not just created, they must expand and grow. Expansions come with the hiring of more staff, acquisition of some properties, gadgets, equipment, software’s/technologies, marketing campaigns and the like. It is therefore imperative for SMEs to have a savings goal for expansion.

• Strive to cut costs: Frugality is key to the success of any SME. When inventories of monthly expenditure are done, consider areas where costs can be cut or minimised without compromising on product or service quality.

There are three main components in every budget.

• Statement of Financial Position (The Balance Sheet) : this is a statement of the financial position that reports a company’s assets, liabilities and equity as at a specific point in time.

• The Income Statement (Profit and Loss) :  It is also known as the profit and lost statement and reports on the company’s income, expenses and profits over a certain period of time.

• A Cash Flow statement reports on the flow of cash in and out of a company, showing changes in the balance sheet and how those changes affect the availability of cash.

For most SME’s, it appears employing bookkeepers rather than qualified finance professionals in the preparation of the budgets is costly but, engaging them on consultancy basis is a possibility to be explored. However, regardless of the financial position of the SME, budgeting is essential.

It is important to note that the budgeting process should not be done in a silo. It must be carried out together with other departments, units and teams. The finance team has a key responsibility in explaining the essence of budgeting and what is required from the other departments.  The inputs of managers and stakeholders in the preparation of budgets is important.

There must be a sizable amount of flexibility when it comes to budgeting due to the fluctuating cost of items. Changes in our world are rapid so having a two year or even annual projection may not be fully accurate. This has given rise to flexible budgeting by companies where budgets and key assumptions are evaluated on a quarterly basis to make room for any need adjustments and alterations after critical assessment of actual figures

In summary, budgeting is vital for business success.

ARK KASA… THINK DIFFERENT!!!

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