It is that time of year again when businesses start working on their annual budget for the upcoming year. Recently, there has been some discussion in the accounting community about the value of the annual budget process.
For small business owners, the annual budget process can take considerable time and resources that might be better put to other use. Budgeting often involves a long and painful process of estimating future sales, expenses, headcount and so forth. To make matters worse, by the time the budget has been finalized and approved the assumptions used to create it can often be wrong. I can personally attest to this having heard over the years a few business owners complain, “The budget isn’t worth the paper it is printed on.”
Additionally, strict adherence to a budget can lead to undesirable business decisions such as playing timing games with revenue to be reported in one period versus another. Potentially even worse, delaying expenditures to come in under budget in one period at the expense of subsequent period.
Despite these drawbacks, an annual budget, periodically revised during the year to incorporate new information is still a valuable business tool. The annual budget process provides:
- Strategy formation for the upcoming year
- Communication of the goals for the next fiscal year
- Performance evaluation of business lines, salespeople and other staff
- Operational planning and guidelines
This is by no means an all-inclusive list.
While the annual budget process isn’t perfect, the bottom line is when used properly and updated periodically, a budget can help business owners better understand their business and help them plan and communicate their strategy for the upcoming year.