Budgeting is a science as well as art. Many business people are familiar with project budgeting, where they start dividing the work into manageable chunks, assessing deliverables, and estimating material, time and labour. Many also are familiar with year-by-year budgeting.
While it is important to have a solid year by year budgeting or project budgeting processes, strategic budgeting is a vital requirement for sustaining your success. It is your role as a leader to develop a strong financial foundation for your long-term success.
There are many tools financial managers use to budget, such as zero-based budgeting and other financial statements and projections, but in many cases, businesses use incremental budgeting approach and fail to consider the following three key elements:
It is a common practice in the not-for-profit sector to lock up some unrestricted fund balance as a safety cushion to deal with unexpected events. However, many small and medium size businesses fail to incorporate the concept of operating reserve in their budgeting process.
One great benefit of keeping an operating fund is the business preparedness to a sudden downturn in revenues especially when the economy slowdown or in seasonal types of businesses.
MAINTENANCE AND REPLACEMENT RESERVE
Keeping your building or equipment well-maintained is crucial to providing your customers and clients with high-quality products or services. When you buy your equipment at the beginning of your business, you might take depreciation into account, but failing to set aside a reserve to cover any future maintenance or upgrade costs might jeopardize your product and service quality adding unnecessary pressure over your operating budget.
DEBT MANAGEMENT RESERVE
On starting a business, you might seek a loan or some other sort of debt to finance your venture. By building a reserve to handle debt payments when your business is not generating enough revenues, you might not need to develop a repayment plan and increase your interest charges.
Strategic budgeting is not only building reserves to prevent future unexpected interruptions, but it is also about linking spending to the company’s strategic goals and top priorities.
- This article was published on Corporita Magazine