There is always a discussion about the importance of budgeting in our lives every day and it’s a good thing too. The benefits are vastly superior to the time and effort required in the immediate and long run. In the current economic climate, budgeting is more essential than ever before to ensure that you and your family are in financial security and work effectively to meet your financial goals or lifestyle goals.
Also, in the economy today importance of budgeting in government and organizations cannot be underestimated, before we look at the 5 importance of budgeting, what do you understand by budget?
What is a budget?
What is budgeting? Are ways to make sure you don’t spend more than you earn and that you have enough money to meet your financial goals. A formalized budget provides a strategy to determine how you will use your money. It could be as elaborate as a spreadsheet or a software application or as straightforward as an inventory of categories for income and expenses and summaries drawn out on a piece of paper.
Five (5) Importance of Budgeting
1. It Helps Set Your Goals and Objectives You Would Like To Attain
A budget can help you identify your long-term goals, and guide you on the right path to making progress towards these goals. A set of criteria or diagram of how to spend your budget will guarantee that you live within your budget and strive towards purchasing those items like a new car, a downpayment for a home, or the possibility of a holiday with your family.
2. It Ensures You Don’t Spend More Than You Earn
Spending on discretionary items is one area in which consumers have spent more than they’ve earned and they owed the entire amount to a credit card. A recent study conducted by WalletHub found that the average amount of credit card debt per household was $8,377 in 2016. This shows that we’re spending our money on credit, rather than saving money to pay for our expenses.
3. Its Helps to Be Prepared In Case Of An Emergency
You never be sure when something unexpected might happen, since life is full of unexpected events, some good and some not so good. An emergency fund can help to give you peace of mind that you’ll have money available in case of need. For the majority of us, this could be anywhere from three and six months of living expenses. This is something to build within your spending plan. It’s not necessary to be done in a single day, but it could be built over time.
4. Budgeting Can Help Curb Bad Spending Habits
The process of creating a budget requires you to control how much you spend. This can allow you to discover areas or things you’re spending more money on than you need to. Always asking yourself whether it’s a necessity will allow you to determine the value versus the cost to you. This will help you think about how you spend your money, and also help you focus on your financial goals and goals in the future.
5. It Ensure You Will Be Content When You Retire
Importance of budgeting – The significance of putting aside some of your money in your savings account for investment will become apparent as time passes. Using a specific portion out of your income from your budget can be used during your retirement, and the investments can help you build your Nest egg.
Budgets of various types
After you must have read the importance of budgeting, let’s walk you through the various kinds of budgets and how they are used when drafting the business plan.
· Personal budget
A personal budget or domestic budget is a financial plan that points to future personal profit costs, savings, and debt repayment. Personal budgets are ways to make sure you don’t spend more than you earn and that you have enough money to meet your financial goals. Past expenditure and personal debts are considered when creating a personal budget.
· Master budget
The master budget can be described as an amalgamation of budgets at a lower level created by different functional departments within an organization. It incorporates the financial statements as an input as well as the cash forecast as well as the financial program. The management teams utilize master budgets to determine the actions they must take to meet their goals.
In larger companies, the upper management is accountable for preparing numerous versions in the form of a master budget prior to when it is finally approved. After it has been examined for the last time, the budget can be allotted to specific business functions.
Smaller businesses typically use spreadsheets for creating their budgets. However, replacing spreadsheets with effective budgeting software usually reduces the chances of making mistakes.
· Operating budget
The operating budget reveals the anticipated revenue of a business as well as the associated expenses over a certain period of time. It’s a lot like the profit and loss report. It comprises the fixed and variable costs of capital expenditures, as well as non-operating costs. While this is a top-level summary report every line item is covered with the relevant information. This data is valuable to verify that the business is spending in line with the plans it has set for itself.
In many companies, the company’s management creates the budget at the start of the year. The document is revised during the year, either each quarter or every month, and is utilized as a forecast for consecutive years.
Cash budget
Cash budget – the importance of budgeting for a cash budget is the estimate of the amount that flows into or from a company for an exact time period. Businesses create cash budgets by making an inference from sales forecasts as well as production figures, and also by estimating the balances of payables and receivables.
The information contained in this budget will help you assess whether you have enough cash in your account to run your business, whether the money you have is being used effectively if there is any and whether you’re on track to turn profits.
· Financial budget
The budget is designed by businesses to determine the amount of capital they’ll require and when they’ll need it for satisfying their short- and long-term requirements. It includes the assets, liabilities, and stakeholders’ equity. The key components of this budget give you an overall view of the health of your business.
· Labor budget
For any company that is looking to hire employees to accomplish its goals, a labor budget is crucial. It assists you in determining the number of employees you’ll require to meet your objectives so that you can prepare the payroll of all the employees. Apart from planning the regular payroll, this aids in the allocation of expenses for workers on seasonal leave.
· Budget static
As the title suggests the budget is a forecast of revenue and expenditures that are in place all through the year. The line items of the budget can be used to set goals regardless of any increase or reduction in sales. The static budgets are usually drafted by educational institutions, nonprofits, or government agencies who have been assigned an amount that is fixed to fund their work in each sector.
Conclusion
In conclusion, the importance of budgeting is to help you identify your long-term goals, and guide you on the right path to making progress towards these goals.