What needs to be considered when setting a company's budget?

Updated: 15/12/21

Planning a good budget of a company is the key to being able to implement a good business strategy. In short, the budget provides a forward-looking view that forecasts the behaviour of a number of economic variables, ranging from sales per customer to investments in innovation.

Types of budgets

The budgets are a key tool to implement a business strategy designed by the organisation, this economic planning has to take into account the four essential aspects of a company: administrative expenses, sales, production and financial aspects.

The budget will be centred around administrative expenditure, which sets the expenditure designated to the other three aspects. The sales and production budget establishes the expected sales in that year taking into account a given demand, to these sales it will be necessary to establish a production based on the supply that the company is willing to achieve.

The financial budget is the last thing to plan for, as it is responsible for defining the cash flow (profit or loss at the end of the given period) that shapes the three previous aspects. A financial budget can be oriented towards the survival of the company, staying ahead of the competition or making a profit.

Phases in drawing up a company budget

Company budgets are usually carried out on an annual basisand sometimes every two years. Budgeting should not be neglected, as the longer the timeframe, the more difficult it is to monitor the achievement of objectives.

Budgeting consists of a number of steps that must be followed to ensure proper implementation and evaluation.

1. Internal and external analysisYou can follow the SWOT analysis method, which analyses all the internal and external variables that influence the company's performance. By knowing these essential aspects of your business you will be able to focus your budget spending on the most important areas.

2. Plan the areas that require the largest budgetIn this step, it is necessary to detail each and every one of the activities that require expenditure in the company, as well as the material and economic resources that are needed.

3. Meeting with all areas of the companyEach area of a company has specific interests and is aware of the specific aspects on which the company should focus its efforts. It is essential to plan budgets that take into account all departments.

4. Set objectives for each departmentGood budgets should specify the objectives to be met by each area or department of a company and ensure that these objectives are monitored during the budget period.

5. Offer motivation and achievable goalsSetting realistic goals (which does not mean easy to achieve) gives employees an incentive. Moreover, if their achievements are recognised, they will eventually become voluntarily involved in the success of the company.

6. Control toolBudgeting: Budgets are totally useless if they are not monitored after the established period of validity. It is essential to analyse whether the objectives have been met and whether the activities have been in line with the budget allocated to each of them, and any deviations must be corrected and readjusted in next year's budget.