A budget is a financial map to financial freedom. It uses statements as landmarks for where you need to be, what you should have at each point, and what you should leave when you get there. The statement features income and utility, and the ultimate goal of drawing a budget is usually to regulate utility to fit within the income.
Today we explore some features that all successful budgets have to use as a template to draw up our own.
Characteristics of a Successful Budget
The goal is the most critical driver for any budget ever invented, whether the participants were aware of it or not. It informs the parameters that you will use to set targets and measure performance. Unfortunately, what makes many budgets fail is being set up to track actual costs as opposed to reaching set targets.
An ideal performance budget should be geared towards reducing expenses to a certain amount, limiting waste, saving enough money to purchase new equipment, paying for college, setting up a retirement fund, expanding an enterprise, or any other measurable budgeting gain.
Many budgets are limited to recreating the previous term’s results and don’t have a short or long-term vision because they lack goals and direction.
That being said, the type of goals you set during budget preparation should be achievable based on the prevailing circumstances. If the mentality from the onset is that they are impossible targets, the spark that drives people to go for them will not be ignited in the first place. On the other hand, the more relevant the goals are, the higher the motivation levels.
The items in the budget should be relatable for it to make sense to anybody who will participate in executing it. The categories of income and expenditure and the methods of accounting for them should reflect what is actually on the ground.
The income and expenditure projections are more relevant if they are based on current statistics instead of conjuring ideal situations that will leave loopholes for justifying why you did not meet the unrealistic targets.
There should also be enough categories so that it is easy to break down and monitor where the money is going and if the spending is worth the investment. A line item budget also helps to identify where you can cut costs and where more funds should be directed.
Having too many categories, however, can be counterproductive as tracking all the variables will become overwhelming. The optimum number of separate items in your budget will depend on your personality and the number of people in the team that monitors the budget.
Correct Income Projections
Every budget period is based on expected earnings and misrepresenting this will defeat the purpose of having the budget in the first place. Factor in all sources of income so that you are accountable for everything. Combine both capital and proceeds from the capital while taking care not to overestimate your earning capability.
If the projection is too high, you will struggle to complete scheduled projects. The situation may worsen when the team that is supposed to implement the budget realizes that it is an impossible task. They will develop a level of apathy whose unfortunate risk is revenue fabrication. It will normalize underperformance.
Inclusion of Variable and Discretionary Expenses
It is possible to be too engrossed with recurrent running expenses that you fail to factor in some other expenses taken care of by the same funds. This may disrupt the budgeting process completely when these expenses are due because you are forced to take from other important budget sections.
Variable expenses are expenses that you don’t pay regularly, but you have to pay when they fall due. These include licenses, insurance, car maintenance, taxes, contracts, among others. If they are too much to cover with a month’s budget, remember to spread the cost over many months so that you don’t struggle when they are due.
Discretionary expenses are essential expenses that are not mandatory, tempting you to omit them from the budget. These include entertainment, team building, corporate social responsibility, and related expenditures.
It is easy to bury your head in the sand when the economy is tight, but that is also when these activities are needed the most. They are critical for mental health both individually and for an organization. Including them in the budget makes them less of a burden and helps ensure a more successful business.
Any budget worth its salt should have an allowance for changes that may be necessary in between their period. Circumstances are prone to change, and sometimes you discover that your initial projections were inaccurate. The ability to readjust on the fly enables you to change strategy or adapt to new developments to better your organization and experience a more successful budgeting process.
The reasons vary from new market intelligence, unforeseen maintenance, new technology to the prevailing Coronavirus pandemic.
A rigid budget plan will be used as an excuse for not executing remedial plans when events have overtaken the initial one. It can handicap you when opportunity knocks.
You can enhance your budget’s flexibility by having a contingency kitty or making provisions for miscellaneous funds. Having a savings fund or other financial plan on the side can also be a buffer in such times.
A successful budget requires an avenue for channeling the surplus income. It is from savings that investments and down payments are borne.
Income channels are prone to be inconsistent, and you may find yourself with unforeseen liquidity. There is a high chance of this going to waste if there is no place to channel the excesses. This should not be a problem if there is a savings plan in place already.
Savings are the budget’s backup for emerging projects, and unforeseen calamities and provisions should be made for them like any other expenditure.
To know if a budget is successful, you should constantly be able to measure the variables so that you can weigh where you are against where you envisioned you would be. All targets must be measurable so that you can know in good time if your strategy is working, how to enhance its efficiency, and what needs to be modified to achieve a balanced budget.
A budget is a great tool for gauging performance for an individual or an institution. If you use budgeting correctly, it can be the difference between achieving your goals and going around in circles. Of course, how you put these characteristics into play will depend on your situation and your motivation when it comes to budgetary control.