Budgeting has only one rule: Do not go over budget. —Leslie Tayne
Budgets can prove to be costly, time-consuming, and can appear to be restrictive and limiting. Sticking to the budget can sometimes seem like an impossible task. Projects do not always go as planned, more resources are needed than you bargained for, and unexpected expenses need to be incurred. In these cases, budgets add more stress and do not contribute to a successful innovative business environment. This can all be changed by using financial analysis to ensure a budget is set up in a more effective manner, which will help keep budgets more applicable, adjustable, and practical.
Financial analysis will help to set the budget straight by understanding the causes and reasons for movements in certain income and expenses. The analysis will help see how certain strategies worked out and is used to better plan the following year by looking at the financials in more depth.
Financial analysis typically provides:
- Year-to-year changes in income and expenses
- Key ratios to better assess performance
- Management’s comments on significant changes in forecasts
- Creating expectancies on certain changes in expenses incurred for the year or revenue patterns
Budgets will prove to be more applicable as management creates a clearer picture on deviations in previous periods and why they occurred. Management will know how to set up budgets by analyzing trends and to address any deficiencies picked up from prior experience. Budgets will be more adjustable as management will be able to calculate probability statistics, which will help decide what route to follow if a certain event occurs.
All and all, budgets will turn out to be more practical if better data and indicators are available to factually support plans. For more information on effective budgeting for companies, please contact us.