Top 5 Benefits of Budgeting in Business for 2024

A business budget is a document that allows managers to understand the financial environment they are working in. It can be a company-wide budget or it can relate to only a department or function within the organisation. It can just be based on the results of the company as a whole or it can be a series of interlinked departmental budgets that roll up into a single organisational document.

What is budgeting in business?

A budget is a financial outlook produced before the start of the period in question. Most commonly a company will have a budget for the year ahead which will include things like the amount of money the company expects to spend on wages, premises costs and general expenses. It will also include a target for income. 

Budgets can also be allocated to projects, departments, people, in fact, any area of business activity.

Types of Budgeting 

In general, there are three types of budget;  

• Incremental budgeting 
• Zero-based budgeting 
• Activity-based budgeting 

Now many consultants will invent exciting sounding names for a budgeting method but whatever they call it, the process will be one of the above or a mixture of all three. 

Incremental budgeting 

Arguably the easiest form of budgeting, incremental budgeting takes previous budgets or results and just adds a bit on. 

The big wins for the incremental method are that it is simple, understandable and super-quick and good-quality financial software can almost do this automatically. 

However, you do need to be aware that using the incremental method is likely to bake in inefficiencies. For example, if you have a budget for vehicle fuel when the company has just converted to EVs then you have probably overstated the costs by a wide margin. 

So whilst there is a lot to be said for incremental budgeting it tends to be inadequate for fast-growing, flexible businesses. 

Zero-based budgeting 

Zero-Based Budgeting (ZBB) is a method of building a budget from a standing start. 

In contrast to incremental budgeting, zero-based budgeting assumes that everything is a waste of money unless you can justify its inclusion and you have to have some methodology for assessing what the cost will be.

Looking back at our EV example above, the manager would be required to justify the inclusion of fuel costs for their vehicles. In the case of the ZBB, they would clearly see that there was no reason to include fuel costs and instead, they probably needed to add in an extra line for either vehicle charging on-site or payments to employees for charging at home. 

Activity-based budgeting

Activity Based Budgeting (ABB) is a method that looks at activity and assigns a value per unit. For example, you may say that postage and packing costs are £2.50 per order received or gas costs are 10p per pint of beer brewed.

By multiplying your activity cost by the number of packages you think you will sell or pints you expect to brew, you can get to the budget for the year.

You’ll need to do that for every line in your budget where there is a variable cost (so most likely not for office rent or rates). This means that you will need to fully understand the way your business works and what the drivers for costs really are.

In contrast to incremental budgeting, ABB can get very complicated and time-consuming so many finance teams don’t use it.

But ABB is excellent for genuinely understanding how your business works, what the drivers for costs and income actually are and being able to accurately predict results when activity levels change. 

While there are many benefits of budgeting, the five main ones below are demonstrating how implementing a budgeting strategy is worth the effort and resources.

1. You'll improve financial planning and management across the business

There’s an old saying “What gets measured, gets done” and this is very much the case with budgets.

If your company is struggling to rein in costs then producing a budget is a great way to let people see what they are truly spending.

A comprehensive budget can also help with;

• Resource availability and allocation - understanding how many people you need for each area and what they should cost
• Cash flow management - Understanding what costs are likely to appear and when payments will need to be made
• Overspending - stopping the expense of projects and service lines from running away.

2. You can set realistic and achievable goals and focus on long-term strategic planning

Sometimes it is comforting to bury our head in the sand and hope everything will turn out all right but in business this is a dangerous tactic and professional financial reporting is a must.

Good managers know that a budget will help them to; 

• Set and report on internal goals - if every department is doing its bit then the company will do well. Keeping everything in a financial dashboard can help improve visibility across the organisation.
• Meeting financial objectives - if your business has stretch targets, then tracking the right financial KPIs and telling people what they need to do to achieve them will help.
• Improved long-term strategy - budgets don’t just have to be for one year. They can be for any period for the organisation as a whole or they can be for the life of a project.

3. You'll be able to identify growth opportunities and investments more easily

Imagine that you produce a budget and it shows up an overspend that you can drastically reduce. How good would it be to be able to reinvest that cash into further marketing or promotional activity that will develop your income streams?

A professional budget;

• Can lead to financing opportunities
• Makes it easier to communicate with shareholders and senior stakeholders
• Identifies the most profitable areas of the business.

4. The finance team can align their operations with risk management strategies

A great finance team understands that its job is to support operations and provide the environment for the business to thrive

A business plan with associated budgets can be the central point which helps to;

• Provide a pivotal plan - so that everyone understands what the aim is
• Identify and mitigate risks - highlight areas of uncertainty so that they can be mitigated
• Enable the finance team to be prepared for emergencies - allow the team to produce disaster recovery and emergency management strategies.

5. Everyone will make better financial decisions in the long run

If you have never produced a business plan for your business then you may be surprised to know that managers and heads of departments often welcome a budget because it;

• Gives a clear sight of spending and results - managers are often worried that they are doing something wrong when it comes to money and a budget helps them understand what is allowed and not allowed
• Helps prioritise projects - if a department has two possible projects which one does it choose? A budget can help them decide
• Identifying spending patterns - a budget can show managers where the money is going and help them understand why.

The single biggest challenge for any business starting to budget is the availability of accurate and timely financial data.

Put simply there is no point producing a budget three months into your financial year and if you work using incorrect figures then it is going to be wrong anyway.

Naturally, having available finance team resource is also a very common challenge although this is less so if you have a finance system that can budget almost automatically.

If you decide to go for ZBB or ABB then you may need to involve the wider business which will require you to reach out and almost set up a business partnering approach.

But that having been said, a small investment in great Finance management software can reduce the challenges and make budgeting a much easier and more accurate process.

How to Budget and Forecast for Your Business 

How to prepare a business budget -in 10 steps:

1. Decide what you want to produce 

Are you going to produce a single business budget or do you want to do departmental, project, process or resource budgets too? 

2. Decide on the method you want to use. 

Remember that incremental is the simplest but may not be the most accurate. 

3. Gather data 

Typically the starting point will be last year’s results. If you know what a department did last year then you can start to think about what they will do next year. 

4. Produce an outline budget 

It doesn’t have to be super detailed or accurate at this point. Think of it like a Christmas tree that you will decorate in stages 

5. Speak with your team and management 

Your finance team will be able to take specific areas and give their thoughts on whether your outline number is sensible or not. What is management trying to achieve this year? Do they have any large projects in the pipeline? Are there any areas they’d like to focus on 

6. Bring in outside intelligence 

Is there anything happening in the wider world that may affect your numbers such as interest rate changes, economic downturns or government initiatives in your sector? 

7. Run them by the stakeholders 

Do your initial numbers make sense? Is there anything you should know about their particular department or project? 

8. Get sign off 

Every organisation is different in terms of sign off process but usually, this will be at board or senior manager level 

9. Monitor 

Monitor your budget throughout the year and make quarterly forecasts based on the actual numbers versus your prediction 

10. Learn the lessons 

The important thing to remember is that it’s not about being right, it is about being less wrong. There will always be things that you miss but you can use your budgeting as a method of learning that will produce better budgets in the future. 

Budgeting is a business essential that every professional organisation should adopt.

This is even more true for fast-growing, flexible businesses that are on the move.

Budgets can not only save you money but they can also highlight opportunities that might otherwise not be spotted.

Having a clear sight of the numbers helps people to make better decisions and gives managers confidence that they are on the right track.

But budgeting can be resource-intensive and requires access to accurate and timely data so having a capable financial system in place is vital.