Enhance profitability by budget planning
It is often observed especially in the MSME sector the concept of budget planning is either missing or it is only with the Owner and the accountant. No one else is preview to the details.
One of the main reason for a business to exist is to make profits. But many a times the business owners focus will be on Sales(Revenue) and are happy with whatever profit is achieved. This is where the owners need to understand the importance of preparing a budget. This is the first step. So what is a budget and why is it important.
Budget is a financial plan for the future considering the Revenue(Sales) and Cost(expenses) of the business. Ideally 3 to 5 year plan is a must and the first year to be a firm plan. In simple terms projection of the profit and loss account month wise for the first year will be very valuable. In other words it is estimate (itemized) of sales and expenditure. Once it is prepared it can be compared with the actuals to understand the variances. This is to be prepared in advance.
The budget is also a plan for savings, borrowing, spending, capital expenditure.
The budget amounts are to prepared by the respective managers who spend the money: production, quality, maintenance, Design, Sales, HR, Purchase & Accounts. Sales have to first give their projections based on which other departments work out their expenses.
The combination of these budgets is termed as Master Budget of the organization or Profit plan. The budget is to be prepared based on the long term and annual objectives of the organization.
The actuals are compared every month so that they can take necessary action if the expense have exceeded the plan and plan for improvement activities.
In general Sales minus expenses is profit. If you have to increase the profit
1) increase sales and ,
2) Reduce expenses.
The Sales can be increased by a)increasing the order book 2)improve productivity by better utilization of resources, reduce rejections and rework, upkeep of machines and utilities.
The variation has to be analyzed in detail and actions taken by elimination, control the variable expense, prioritize the expense, have a authority to approve expense, need based expense etc,
Overall Advantages of Budgeting:
Since the sales, Expenses and Profit is predicted in advance , the organization can plan improvement activities and increase the profitability.
Future expenses on capital can be planned in advance.
Cash flow improves.
Employee engagement will improve.
Alignment to goals of the organization by all members.
Managers will be more accountable.
Raghavendra.B.S is a seasoned Mechanical Engineering professional with 30+ years of experience in Manufacturing Operations. He has extensive experience in driving operational and manufacturing excellence (Business Excellence) in reputed Auto/Aerospace / non-automotive industries.
He has the ability to enhance the efficiency of the entire business process of the industry using Good Manufacturing Practices(GMP) and Lean Manufacturing systems effectively resulting in a profitable World Class Organization.
Trained ZED Assessor and Master Trainer by QCI
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