6 Common Mistakes When Developing Financial Budgets for a Company

6 Common Mistakes When Developing Financial Budgets for a Company

There is no doubt that for a company to have the capacity to grow, it must have efficient management of its financial resources.

Implementing the practice of preparing budgets is a way to ensure that your organization will be taking advantage of resources efficiently, and that the company will be able to meet current and future commitments. This is a way to visualize the possible scenarios that can be present both internally in the organization and in the market in which it competes.

During the planning and implementation of budgeting for your company, there is the possibility of some errors that may cause you to fall short of your budgeting and planning objectives. In that vein, I would like to share the list below of 6 common mistakes companies make when developing financial budgets for a business.

1. Do not align the budget to the strategy and planning of the organization

As the budget is a tool that is part of the integral management of the company, it’s very important that it’s aligned with the organizational strategy and the higher goals that are contemplated to achieve. Companies use the budget as a system of administrative control to establish objectives, allocate resources and review results, however in most cases this process focuses on the short term and is not done taking into account strategic planning what is An error since it has a great impact on the performance of the company.

The strategy and the budget must coincide in the same way despite having different time approaches since if for example in the planning you have decided that a main strategy of this year is to achieve the growth of the market share of your company and The budget is focused on cost reduction what will happen is that the objectives will be contradictory and in the end can not be successfully achieved. The budget is the strategy seen from the economic point of view, so it is of great value that they are aligned.

2. Focus budget responsibility on the Directorate-General

While it’s true that budgets should be an initiative in which the top management of the company is involved, responsibility for design, execution and control should be delegated to each of the area’s managers. It’s essential that each operational area has its individual budget to make control and monitoring easier, which in turn will contribute to budget compliance Organizational structure.

3. Overestimation in the Sales Forecast

A very common mistake that can occur when developing a budget is to forecast a more optimistic scenario than market conditions allow; that is to project sales that are well above real sales.

It’s necessary that the calculation of the sales budget be done with great care and caution since if sales don’t match what’s feasible to achieve, you could be compromising resources that you don’t have and as a consequence the company will be in difficulties to fulfill its commitments agreed with both clients and suppliers.

Remember that the budget is a forecast of what is expected to happen therefore, it is preferable that you are objective and prudent, to estimate this amount you can rely on different methods to make a sales forecast and in the format of budget that we offer

4. Do not use the budget as a tool for continuous improvement

To make the most of this management tool, it’s fundamental that you not only identify it as an alternative to control expenses, but also to see it as a guide to generate a cycle of continuous improvement within the organization. There are many ways in which the budget can help you, for example by detecting areas of opportunity where you can improve the productivity of the company in an important way thanks to an optimized process or the reduction of waste.

Avoid making budgets automatically and repetitively year by year, you can get a lot of information of value if you carry out an analysis of the information and results obtained which will allow you to make decisions that will lead you to a more profitable and efficient company.

5. Make the budget a method of pressure and control

When the budget is used more as a method to monitor and critically point out what managers do, it loses the sense of its main function that is to make the company more efficient with the use of existing resources. If the budget is imposed as a way of exerting pressure, it falls into the danger of discouraging employees from rejecting the practice of this methodology and not being as cooperative as they could be.

It is important to emphasize that although making a budget is a great help for the administrative control of your company, this should also serve as a challenge for each of your area leaders for which they will give all their effort to reach the goals and targets Which are determined in the same, this for the benefit of the company and likewise for its own professional improvement.

6. Forgetting about the budget after you complete it

Yes, preparing an annual budget can be an arduous process and involves investing a lot of time and effort, however it is of great importance that you do not fall into the error that, once the budget has been made, it will be forgotten until a revision is made At the end of the year to compare results. Keeping a constant and regular monitoring and adjustment of the budget is essential as this will allow you to better visualize the needs and challenges that the company has at that moment, so you can make important decisions in a timely manner.

Leave a Reply

Your email address will not be published.