In the contemporary business world, preparing a discretionary budget is one of the most important tools that contribute to the success of companies and institutions in achieving their financial goals. It is simply a strategic process through which financial resources are planned and directed in an effective and controlled manner, reflecting the company’s vision and future goals. This budget is a powerful tool that enables you to make informed financial decisions and determine investment priorities based on accurate estimates of expected revenues and expenses. It enables you to control the costs of operations and projects and plan the use of funds in a way that achieves a balance between revenues and expenses. In this article, we will talk about the estimated budget and how to prepare it. So if you are looking for the right way to control your money and achieve strong financial sustainability, then this article is your comprehensive guide, so follow along with us.
Preparing this budget is extremely important for individuals and companies alike, as it helps to develop clear and systematic financial plans for revenues and expenses, which enable the person or company to achieve their financial goals in an effective and organized manner. Its importance lies in the following:
Preparing the estimated budget helps determine the main financial goals of the person or company. By clearly defining these goals, it becomes possible to focus on achieving them and take the necessary steps to achieve them.
A discretionary budget enables a person or company to achieve financial balance, avoid a financial deficit or surplus, and develop accurate plans for revenues and expenses. Financial efforts are directed effectively according to established priorities and objectives.
Estimated budgeting promotes sound financial decision-making. When we have accurate estimates of expenses and revenues, we are able to make informed decisions about investments, expansion, and cost management.
The estimated budget can help the company analyze its financial performance and evaluate its sustainable growth. By comparing the estimated budget with actual performance, the company can identify areas of strength and weakness and take the necessary measures to improve its financial efficiency.
The estimated budget also enables the company to better plan purchases and investments, as the company can set priorities and allocate financial resources based on the goals specified in the budget.
Preparing the estimated budget must be an ongoing process, reviewed periodically, and occur based on financial and economic changes and targeted goals.
Achieving the estimated budget objectives plays a crucial role in the success of projects, and the most important main points of these objectives can be summarized as follows:
The estimated budget is a powerful tool for determining the cost of the project and distributing resources among various activities. By determining the cost of labor, materials, contractors, and other resources, the project can achieve an appropriate balance and determine priorities based on its needs.
The budget serves as a roadmap for the project manager to ensure its successful implementation. It helps in setting time and financial goals, controlling costs and risks, and, by tracking project costs and comparing them with the planned budget, corrective action can be taken in the event of unwanted deviations.
Preparing the estimated budget provides clear and specific goals for all project participants, including managers and stakeholders, as these goals serve as a reference for measuring project performance and enhance transparency and accountability. We note here that, thanks to this transparency, possible reasons for exceeding goals can be identified, and the necessary actions can be taken to correct the course.
By setting a budget, it provides a framework for understanding potential challenges and problems that the project may face. Managers can use this information to make effective and quick decisions to avoid potential problems and successfully achieve project goals.
When it comes to preparing the estimated budget, there are specific steps that must be followed to obtain an accurate estimate of the expected revenues and expenses in the coming year, which are as follows:
Are you looking for a good way to easily understand how to budget? So here is a practical example for you to use to prepare the estimated budget for a clothing manufacturing and selling company:
The budget preparation process begins with estimating expected sales, and here in this example, we will assume that the company aims to achieve total sales of 1,000,000,000 Saudi riyals during the coming year.
It is then necessary to calculate the variable costs associated with production and sales. These costs usually include raw material costs, manufacturing costs, labor costs, and shipping costs. We will assume that the variable costs represent 60% of the total expected sales, i.e., 600,000 Saudi riyals.
After that, you must calculate the fixed costs that do not change based on the volume of sales. These costs usually include rental costs, fixed salaries for employees, etc. In this example, we will assume that the company’s fixed costs amount to 400,000 Saudi riyals.
After calculating the variable and fixed costs, it is necessary to calculate the estimated profit, which is the difference between total sales and the variable and fixed costs. In this example, the estimated profit is 1,000,000 Saudi riyals (total expected sales) minus 600,000 riyals (variable costs) and 400,000 riyals (fixed costs) = 0 Saudi riyals.
In this example, the company is expected to be break-even with no profit over the next year.
If you want a model that explains how to prepare a budget in an easy and attractive way, just click here.
A weak estimated budget process is one of the reasons that lead to project failure, in addition to the following:
This is a major risk and one of the reasons project failures appear especially frequently, as when all costs are not taken into account or are underestimated, the budget exceeds, and the magnitude of this overrun can quickly lead to project failure.
Without the help of a tool, the cost parameters used can be incorrectly calculated, leading to the creation of unreliable budgets and poorly organized planning.
Certain events may occur that no budget can anticipate (natural disaster, supplier bankruptcy, etc.), so it is necessary to take a conservative approach to protect against very high risks.
We find that preparing the estimated budget is a vital and necessary process for individuals and companies alike. It is the first step towards sound financial planning, controlling spending, and achieving financial goals. It is worth noting that when it is correct and realistic, this budget provides us with a comprehensive vision of our income and expenses, helps us in making smart financial decisions, and also enables us to set priorities and allocate resources effectively, which leads to achieving financial balance and avoiding potential financial problems. So preparing it is not just a duty but rather an investment in our financial future and an opportunity to model success and achieve stability.
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After you know how to prepare the estimated budget, try Qoyod now for free for 14 days. It is an accounting program that achieves everything you want and more.
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