Companies undertake the budgeting process to commit to a financial action plan. Budgets help companies organize their finances, identify feasible ventures in which to invest and avoid committing funds to lackluster ventures. They are often designed to increase revenues, too. Before budgeting decisions are made, several issues must be considered, such as available funds and the company’s objectives.
The factors to consider when budgeting for a business are the company's current financial situation, available funds and revenue streams, business goals and the outlook for the industry you're operating in.
Before a budget can be created, business leaders must be aware of their companies’ current financial situation. For example, leaders should know the size of reliable revenue streams, as well as those that may be more variable. Only the reliable revenue should be considered in the budgeting process. Leaders must then determine net revenues by deducting expenses, such as wages and materials, from the reliable revenue.
Leaders must align their budgets with corporate objectives, opportunities and strategies. In addition, when leaders make budgeting decisions, they must consider not only the direct effect of a capital or operating expenditure, but also its indirect effects.
For example, a capital project may have an impact on a company's technical infrastructure and possibly a company's personnel requirements, such as technical support. As a result, budgeting decisions might also include how much to spend for technical infrastructure in various locations or funds that should be dedicated to develop personnel who support the infrastructure.
Risk is a major determinant of the feasibility of business investments. Budget decisions that pertain to national and international investments, therefore, will be influenced by risk-management efforts a company may implement to respond to particular scenarios. For example, a company may implement controls to operate in a country experiencing political instability, civil unrest, as well as climate change and other factors. Also important are the potential market opportunities that are associated with emerging economies and a company’s past experience in particular locales.
Legislation and government regulations can disrupt a company’s marketing, production or financial plans in a major way. As a result, leaders should make budgeting decisions after considering existing or pending laws and government controls that may affect existing or proposed companies' operations. For example, a company that relies on websites to market its products in certain countries must consider the European Union regulations pertaining to privacy.
Industry analysis can provide the context for many budgeting decisions because, in addition to the global economy, industry trends may affect company operations. For example, an industry's outlook is influenced by the ability to improve the technical skills and abilities of company personnel. In turn, government regulations, supply and demand and international transactions also affect industry trends. For example, new government guidelines on permissible emissions may necessitate new equipment or changes to a company's operating procedures, affecting several budget items.
Rarely does a failing project or program justify additional spending. Instead, funds should be committed to opportunities for which a positive return on investment is expected. For this reason, prior period and historic results have a significant influence on current budgeting decisions. To evaluate the probability a project will lead to a positive revenue stream, specific project objectives must be stated and the positive and negative aspects of the opportunities must be identified and evaluated. Only then should budget dollars be committed to the project.