When it comes to proper business control, it always needs to include financial control. Tracking money from two perspectives – that of income and that of expenses, is the tool by which we can appreciate the degree of health and performance of the organization we lead. This basic tool should exist in any organization, be it non-profit. Even if we are talking about a small or very small organization, the need for the existence of the budget is all the more important considering the limited resources and the need to use them as efficiently as possible.
The concept of "financial budget" is frequently circulated, but we rarely find the concrete way in which it must be structured or built.
Differentiation of income and expenses
The first aspect to consider is the clear differentiation of income and expenses. The main arguments for this differentiation are:
For this reason, we will always start the construction of a budget from the way each business is organized; even if we can have similar structures to other businesses, the budget in its entirety will not be identical, but will be a personalized one so as to generate a maximum effect in the strategic decisions that it will train in the organization.
The second vital aspect that needs to be taken into account in order to have a correctly structured budget is the synchronization of the income budget with the types of products and/or services we offer to all categories of customers with the structure of the income budget and the synchronization of the expenditure budget with the internal processes that generate the products and/or services for the customer; to these are added both the support and administrative processes.
A third key aspect is matching revenue targets with the company's goals and ability to serve customers and setting the maximum level of spending according to the actual needs of the company's operation. In this way we will be able to obtain a realistic maximum of income with an optimal consumption of financial resources and our target profit will be achievable. These correct revenue and expense target settings can help us calibrate our expectations regarding the level of profit the company can generate at the end of the year.
The fourth cardinal aspect is given by the financial analysis indicators that must exist in the company. These indicators must be based on data from the income and expenditure budgets. In the absence of such indicators, we run the risk of having only some income and expenditure lists that tell us at most if we have respected the income and expenditure targets. Although they are two very useful pieces of information for budgetary discipline to guarantee the achievement of the proposed targets, only the indicators obtained from cross-referencing the data and their analysis in relation to the added value offered to customers through the company's products and/or services, give us the complete and correct picture of the financial performance of within the organization.
To understand what is the essential difference between a financial budget from a managerial perspective and an accounting budget, we must start from the reason for the existence of the two instruments. Accounting appeared as a state tool to identify the level of taxes that companies owe to the state budget. The financial budget appeared as a tool of managers in the process of planning and controlling the activity in the company. For this reason, the structure of the financial budget will always be flexible and adaptable to the needs of the company and the management team, while the accounting budget will have a rigid form, formally aligned with the laws governing taxation.
To be able to make correct managerial, strategic or financial decisions, it is necessary to be able to measure the actual performance of the company in money. Also, this is recommended to happen in real time, not at random intervals, be it quarterly or semi-annually.
A manager's most effective tool is the financial budget correlated with how the business works
The structure of the financial budget must be correlated with the business model and evolve together with it
Relevant information must be visible as easily and quickly as possible
The information provided by the budget and its indicators must help and even represent the foundation of strategic and financial decisions