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Budgets are a great tool for developing strategy because they present a companyu2019s financial information simply, making it easy for business owners to understand. Budgets enable business owners to have greater confidence in their decision making because they are based on verifiable data, where past trends can be reviewed in contrast to current performance.
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Benefits of Creating Budgets in Business MYM Accounting and Business Consultancy www.mymconsultancy.com.au
A simple analysis of complex issues Budgets are a great tool for developing strategy because they present a company’s financial information simply, making it easy for business owners to understand. Budgets enable business owners to have greater confidence in their decision making because they are based on verifiable data, where past trends can be reviewed in contrast to current performance. Decision-makers can better understand how their recent strategies impact metrics and use these rich insights to help their businesses perform better by rectifying unsound strategies promptly. www.mymconsultancy.com.au
Decision-making based on financial information Surprisingly, business owners make decisions for objective outcomes based on subjective elements. Many of these decisions — due to lack of financial information, or the will to invest effort in collecting financial information, are based on intuition with no solid factual backing. Such decisions might be successful based on luck, but do not form the basis of a solid strategy of a firm consciously and purposefully progressing in the business environment. Budgets help business owners avoid whimsical decision-making and allow them improved clarity and focus on their firm’s future. www.mymconsultancy.com.au
Identification of key drivers and financial implications Risk mitigation is an important aspect of business strategy, and budgets help businesses mitigate their risks by identifying key drivers and how they have an impact on various financial metrics that indicate the health of a firm. Budgets tend to provide an effective way to control cash flow and allow cash to be used optimally in investment activities for better returns. Budgets help owners to make their cash assets work better for them so that they can allocate resources efficiently. www.mymconsultancy.com.au
Facilitate sensitivity analysis Sensitivity analysis is one of the most powerful aspects of a budget or a financial model. It provides an opportunity for the business to see the future impact of their decision. Sensitivity analysis, for instance, could help determine how profits are impacted by a change in the cost of materials procured. Sensitivity analysis is very important when making decisions because it can simulate the outcomes for decision-makers. Proposed changes in key variables can be plugged into the model which in turn will predict the financial implication of the decision. Budgets facilitate sensitivity analysis which in turn aids in making several strategic choices including whether to enter a certain market or not, whether finances need to be used to increase marketing expenditure, or to buy new capital equipment. The budget allows business owners to see how the bottom lines are impacted by the decisions taken and that takes some stress out of the uncertainty of decision-making. www.mymconsultancy.com.au
Setting goals for employees Budgets break down a broad vision into achievable goals and allow for goals to be shared with employees. Expressing a business’s performance in numerical terms allows managers to easily share their thoughts and plans objectively. An additional advantage that budgets provide includes that employees can use the budget to set SMART goals which are specific, measurable, achievable, relevant, and time-bound because the budget relays information in the form of objective numbers which can help goals that have all the SMART features. The budget also helps managers by helping to identify KPIs which can be used to evaluate performance and determine compensation in the form of bonuses and incentives. Budgets have the added flexibility of being models that can be customized as the business or markets change. www.mymconsultancy.com.au
Develop business strategy and action plan Planning has long been used as a process that initiates the business and is considered to be a once in a year activity. However, with the dynamism of the global markets evident through volatile changes that have happened overnight, planning is effective only when it is an ongoing process. This is where budgets are helpful. Budgets can enable managers to take into account the potential changes that are taking place in the market, with customer demand, and the response of the competition. With business plans budgeted, businesses can be proactive in taking advantage of opportunities because they have a sound understanding of which factors can make a positive and significant impact on bottom lines. The budget also allows business managers to be able to review and evaluate progress on goals on a monthly or periodic basis, and in that sense, a budget becomes a guideline for achieving business goals. www.mymconsultancy.com.au
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