Effective Budgeting: Advantages & Essentials

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  • 0:00 What Is a Budget?
  • 0:43 Why Create a Budget?
  • 2:05 What Makes a Good Budget?
  • 3:08 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

Budgets are among the most mentioned types of business documents, but why even bother with them? In this lesson, we'll look at the advantages of a good budget as well as essentials every budget should have.

What Is a Budget?

Wouldn't you like to have a roadmap for your business for the future? Something that shows you exactly where you should be heading and offers a plan to get there? Luckily, that's just what a budget does. A budget is a plan that helps companies figure out where they will be with respect to finances and inventory after a given period of time. As you can imagine, there are numerous types of budgets. However, all of them have a major theme of planning for the future at the heart of them. In this lesson, we'll look not only at the benefits of budgeting, but also learn what companies must be sure to include in order to make their budgets as useful as possible.

Why Create a Budget?

There are plenty of advantages of budgeting. Of course, the foremost is planning. Not only can a company plan on where its expenses are likely to be, but it can also plan on how to best encourage new sales channels. Additionally, budgets allow for companies to plan more precisely when it comes to production, including labor and materials costs. Additionally, budgets can help companies figure out which employees and processes are worthwhile and when to simply slow down operations. This can be done by looking for inefficiencies within the budgeting process. For example, if one department is showing slower than expected movement, this could be a cause for upper management to reexamine that department. It could be that the manager is inefficient, or it could be a structural issue within the company.

Budgets also help companies to reinforce what they should focus on for profits. This is because budgets show where a company makes money. For instance, a well-known tech company used to include the word 'computer' in its name, but shifted away from that practice when budgets showed that it was increasingly drawing its profits from phones, music players, and tablets. Finally, a budget should be used in comparison with the end of period results in order to figure out what went right and what went wrong. Not only are budgets planning tools, but they are useful in analysis as well.

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