Budget DQ1a. \"I Don\'t Need

Budget

DQ1a. "I don't need a budget; I run my own business so it's all in my head. Bothering with a budget would just be a waste of time and money!!"

Do you spend money? Earn money? Then you should have a budget. "Can you name a Fortune 500 company that doesn't have a budget? Don't spend too much time thinking about it - there aren't any. Successful businesses around the world have one thing in common: they budget their money" (The beauty of budgeting, 2009, Investopedia). Simply because a business is small does not mean that it does not need a budget -- only that it may need a different type of budget or business strategy. And in the long run, not having a budget is a drain upon the business in terms of time and money.

In other words, every individual should keep track of their expenses and earnings, which is essentially what defines a budget. A budget can be calculated for a person, family, organization, corporation or government. Even a small enterprise needs to keep track of expenses -- gains, losses, and needed input costs. A budget is required to estimate if revenue and expenses over a specified future period of time will be in balance (Budget, 2009, Investopedia, 2009). A budget also forces an organization to anticipate demand, and thus anticipate how much revenue the organization will accrue, how many goods and services it should strive to acquire to maximize its earnings, and how and when to reinvest in its critical infrastructure. A budget is a guide to making choices and balancing opportunity costs. "A budget is a microeconomic concept that shows the tradeoff made when one good is exchanged for another" (Budget, 2009, Investopedia, 2009).

Different types of budgeting provide different insights. "A cash budget is extremely important, especially for small businesses, because it allows a company to determine how much credit it can extend to customers before it begins to have liquidity problems....[it is] an estimation of the cash inflows and outflows for a business or individual for a specific period of time. Cash budgets are often used to assess whether the entity has sufficient cash to fulfill regular operations and/or whether too much cash is being left in unproductive capacities" (Cash budget, 2009, Investopedia, 2009). Looking over the business' operating expenses can yield insight as to where to cut costs, thus making the business more profitable. Or it can help the business forecast times of peak demand during the business cycle. This can be even more vitally important for small rather than large enterprises, as upturns and downturns in the business cycle for smaller enterprises can be particularly, extremely volatile for smaller enterprises "as they can be more susceptible to industry downturns than larger, more diversified competitors" (Curtis 2009). In today's recessionary environment, keeping track of such cycles is of even greater importance than ever before, specifically in an industry-specific manner, as some industries are more affected than others by the current economic credit crisis.

In the case of capital budgeting: "a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing. Oftentimes, a prospective project's lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target benchmark" (Capital budgeting, 2009, Investopedia). Looking over a spreadsheet can clarify when to make larger purchases, such as waiting until the start of a new billing cycle, or negotiating better payment terms offered by suppliers and any creditors, especially when interest rates are volatile.

Once the need for a budget is established then the organization can consider what type of budget it desires. For example, with zero-based budgeting, "all expenses must be justified for each new period. Every function within an organization is analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one" (Zero-based budgeting, 2009, Investopedia). While it is true that zero-based budgeting is more costly than traditional cost-based budgeting, it also favors enterprises specializing in areas "that achieve direct revenues or production" in the enterprise (Zero-based budgeting, 2009, Investopedia). For larger organizations, this method permits strategic goals to be factored into budgeting process by tying them to specific functions of the organization. Another type of budgeting that is non-traditional is activity-based budgeting, where managers examine the processes and the costs of those processes. "Cost efficiencies can be found by comparing activities performed in different areas of the organization and consolidating or rerouting certain functions" (Activity-based budgeting, 2009, Investopedia).