What is Budgeting: Why is it important
Introduction:
Budgeting is key to success for any individual, entrepreneur, or enterprise. Any person whether in personal life or business needs a good budgeting exercise to achieve desired goals. When it comes to business, an entrepreneur needs to have a clear assessment of future revenue and expenses to plan the future course of business activities in advance. Similarly in personal life also, every person needs to make a reasonable estimation of his/her personal expenditure vis-à-vis income. A good budget helps in fulfilling the above goals. This topic discusses what is budgeting and how it is important for you in the future course of your business and personal life.
What is a Budget?
The term ‘Budget’ means an estimation of revenue and expenses over a specified future period of time. The budgets are generally prepared and compared with the actual results on a periodic basis. An enterprise can prepare a monthly budget or annual budget for assessment of its future course of business and measuring its operational efficiency.
Budgets are not only prepared by a business entities but even the Governments prepare their annual budgets of public expenditure. You can also prepare your personal budget or family budget to plan your monthly expenses and for managing money. Having a budget is necessary to prepare yourself for contingent and unpredictable events in your personal life or business.
5 Reasons why you need a budget?
1. Comparing & analyzing the performance: Budgets are prepared to make an estimation of future revenue and expenditure. The budgeted figures are compared with the actual performance which helps an enterprise to assess the operational efficiency and areas of deficiency.
2. Finance Planner: Budgets like cash budget or cost budget helps an enterprise make a fair estimation of funds required in the near future. Thus, an enterprise can arrange the funds well in advance to fulfill its future operational requirements.
3. Eliminating unnecessary expenditures: Budget facilitates a comparison of budgeted expenditures with actual expenditures of an enterprise. This helps the enterprise in identifying unnecessary expenditures and avoiding them in the future. Even a good household budget will help you in eliminating your unnecessary and wasteful household expenses.
4. Help you prepare for emergencies: Life is filled with unexpected surprises. Any unprecedented event like sickness, divorce, natural calamity, or death can lead to serious financial turmoil. You need to be financially ready for these unexpected events by creating an emergency fund. Your budget should include an emergency fund that consists a cover for such unexpected expenses. Budgeting apps, such as Mint or YNAB provide tools for setting up an emergency fund, depending on your lifestyle.
5. Motivating your team for better performance: Generally, a business enterprise prepares a performance budget for the future and motivate its employees for achieving the budget targets by rewarding them with incentives & bonus, etc. A good budget thus helps an enterprise in improving the performance of its team.
Conclusion: Every entrepreneur or household should prepare its budget for the reasons discussed above. Various online budgeting tools are available for this purpose. Even budgets could be prepared on excel spreadsheets. Budgeting will certainly help you in achieving your business and personal goals.
