THE PRACTICE OF FINANCIAL MANAGEMENT AND BUDGETING FOR SUCCESSFUL BUSINESSES.

Financial management and budgeting are important for the growth of businesses and organisation. They both involve strategic outline and execution of financial plans to achieve specific goals. These goals foster a thriving and successful business.

Financial management is the strategic plan developed by an organization to oversee and direct all financial activities aimed at achieving financial goals. It incorporates all success driven pursuits that sustains and strengthens the longevity of a business in an industry. No organisation or business can thrive without a thorough financial planning or management.

Budgeting in Financial management is a strategic plan that includes all expenses, revenues and income of a business or organisation for a specific period.

Budgets set forth the plans of management in financial terms. It is the one way a business achieve its financial goal. It identifies the sources of income and the best way to allocate them to various financial resources.

Objectives of financial management

It is the duty of persons who occupy positions as financial managers to make effective decisions that sees to a successful financial management within an organisation. These are objectives every financial management scheme aim to achieve:

Profit and Wealth Maximization:

Profit-making is a significant goal for every business establishment. All financial activities are targeted on profit and wealth generation.

Financial management develops strategies that enable businesses to maximize their profits. This is achieved through strategic analysis and the execution of well-defined plans, which ensures ongoing relevance and success of the business.

Business Survival:

In a competitive business environment, every organization aim to ensure its survival, therefore, an effective financial management enable the long term viability of any business.

In other words, financial management strengthens the long run survival of a business in negative situations such as economic downturn, high competition etc. This is achieved through strategic planning and execution, risk management amongst others.

Utility of financial resources:

Through financial management, we get to accurately understand the available incoming and outgoing resources within an organisation.

This understanding fosters proper management and utility. In other words, the organisation channels resources to appropriate areas and avoid any form of waste of the available resources.

Cost Control:

A business gets to effectively manage cost and expenses through financial management. The main activities that drives costs such as labour, materials, transportation etc are identified and best way to manage them are developed.

Cost control and management ensures that an organisation remains within their budgets, monitor cost and expenses and see to the control of expenditure.

These and many more are the core objectives of financial management within any organisation or business .

it improves the financial health and growth of any business.

Types of Budget

Major types of budget used by businesses are

Operating budget

This is simply the total estimate of an organization’s income and expenses for day to day operations over a specific period. It serves as a guide for setting financial goals and plans during the reporting period. This budget helps businesses effectively plan their operational costs for the upcoming timeframe.

Capital Budget:

This involves the plans and resources allocated to long term investments such as expenses for fixed assets like machines, housing etc. It helps a business keep records of its expenses and also enable proper allocation of resources.

With this, risk is effectively managed and financial plans and goals are achieved.

Cash flow budget:

This allows an organization to accurately monitor and forecast the inflow of income from various sources and the outflow of expenses related to investments and expenditures for a specific period.

As a result, the organization can effectively manage its finances, identify liquidity issues, prepare for unexpected expenses, and maintain overall financial stability.

Importance of budgeting for financial management:

Importance of budgeting are as follows:

Financial planning:

Results oriented schemes for planning financial activities are developed through budgeting. In essence, businesses or organisations set out realistic financial goals with effective plans to see to their success.

Allocation of resources:

Budgeting is the total outline of the expenses and income at a time period. It helps in the understanding of available resources, segments to prioritize and appropriate amount of resources to allocate to such areas.

With this and keen supervision of the outcome, businesses effectively manage resource and productivity is maximised.

Tracking Performance:

Budgeting is the proper guide for keeping track of the financial health and performance of a business. A business with financial goals and objectives evaluates its financial progression and regression through budgeting. They get to make informed decisions based on experience, identify problems early and create better strategies and financial plans.

Management of income and expenses:

Through budgeting, there is effective cash flow forecasting. Businesses accurately predict the future income and outgoing expenses within a certain period through previous financial results and cash statements.

This enables inform decisions on matters of investments and allocation of resources. It also sees to the financial stability of such business by allowing it to proactively address unexpected expenses and mitigate potential financial setbacks.

Communication tool

As organisations and businesses set out their financial goals and objectives, budgeting doesn't only serve as a guide for drafting financial plans and strategies, it also sees to the collaborative communication amongst departments and areas within such organisation or business.

This communication is targeted at the general understanding of the financial goals and objectives of a business. It goes further to establish a clear understanding of the level of performance expected of these departments to see to the accomplishment of these financial goals.

This fosters transparent engagement and relationship amongst these departments as they look towards the achievement of their universal financial goals and objectives.

Steps to create an effective budget

There are major steps every successful organisation or business incorporates to achieve financial success. This, when utilised by startups and struggling businesses will yield positive results.

Set financial goals:

The first step to making strategic budget is the identification of specific or defined financial objectives. The identification and setting of a specific goal with narrowed interest brings about effective planning towards the attainment of such goals. E.g of financial goals are profitability goals, debt management goals etc.

Gather financial information:

This involves the compilation of present and historical financial information and data. It includes income sources, present profits, expenses,bills etc. This gives an overview of the present financial situation and gives clarity of the next considerable step to take towards arriving at the set goals.

Estimate future income and expenses:

At this stage, you outline all reliable sources of income into fixed and variable categories . Same is done to all expected expenses which will be categorised into fixed and variable as the case maybe . Examples are rent, salaries and insurance for fixed expenditure and raw materials, utilities for variable expenses.

Monitor previous expenses:

Understanding the areas previously spent on and their results brings clarity on where money should go and where money should not go. While creating a budget, businesses effectively identify major areas to allocate resources to,

Creating a budget

This step requires adequate information and strategic planning. At this stage, the finance department drafts the budget, considering the defined income and expense categories. Income is allocated to various expenses based on their significance to the growth of the organisation.

It is important that total expenses do not exceed total income, as remaining balance is considered profit. When drafting your budget, adhere to the set limits to maintain financial discipline and support long-term sustainability.

Monitor and adjust the budget

Regularly review the budget to inquire if expenses are within the budget. Consider making adjustments in the long run to fit into changes in income and expenses.

Tools and resources for financial management and budgeting

Here are some tools that can help in financial management and budgeting.

Financial management software

This is an application that helps businesses effectively manage financial activities. It helps track expenses, income and assists in budgeting and forecasting. It improves financial visibility and efficiency and providing accurate data for making informed decisions.

Budgeting apps.

These are user friendly applications that helps businesses and individuals track their financial activities. It keeps track of income, expenses implementation of financial goals etc. It tracks and reports financial activities which in turn improves the financial health of a business.

Challenges of financial management and budgeting

There are various obstacles to an effective financial management and budgeting.

Unexpected expenses

In various unforseen circumstances, unexpected expenses disrupt budgets and financial plans. This have been identified as a common challenge. Such unforseen circumstances are car repairs, natural disasters, legal expenses etc.

Economic downturn

Market fluctuations due to economic downturns can also disrupt strategic plans for budgets as there are changes in income and cost of expenses as the case may be.

Lack of financial knowledge

This is a major obstacle to financial plans because one needs adequate financial knowledge to draft a result driven plan or budget.

Conclusion

As mentioned earlier, every business is profit driven and only effective financial management and budgeting can see to the generation of profits and sustainability of such business. With a better understanding of the financial health and situation of a business at a point in time, an effective budget is drafted which when implemented sees to the attainment of financial goals.

Get a proper financial plan today and achieve your financial goals.