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Financial Management Budgeting

There is widespread agreement that debt can often be attributed to a lack of financial management and budgeting. Let’s consider the role of budgeting as a financial management tool…

First, Let’s Define the Term Budget

A budget is a method that is employed to predict foreseeable future financial income and expenditures. It is just a plan for saving and for spending your income.

Why is it Important to Create and Manage to a Budget?

Planning for the future is beneficial for enterprise and for individual purposes. Typically both have forward looking objectives to satisfy and these goals generally need cash. For example, a company might choose to provide a return to shareholders of fifteen percent for instance. A family may want to take an overseas holiday a few months ahead and wants to know if they will have sufficient money. To meet these objectives, you will want to be certain that the cash will be available.

One other reason that budgeting (the practice of generating and managing a budget) is essential is to mitigate risk. Examples of risks that companies may wish to avoid incorporate increasing costs of funds or to avoid declaring bankruptcy. Personal factors for planning for risk are to stay out of debt and the inability to repay.

How to Create and Work with a Budget

budgeting spreadsheetBudgets are long term oriented, so they are created to forecast income and expenditures going forward. The budget should be structured for blocks of time, like every month for example. The time periods are your choice. Let’s explore how we might do this for a typical household.

We will assume that the Jones household wants to budget month to month. The first undertaking is to create a document with columns for the periods of time, in this situation that will be month by month. This could certainly be implemented on paper but a spreadsheet will be better since it will carry out all the calculations automatically.

Next for each month of the year you need to predict how much income will be received. If there are several salary earners in the family, you can easily document income for each of them individually. Look to your bank statements for this information. If there are additional sources of income, then list each of these as well.

Once you have done that we will look at expenses. For expenses, produce categories of each type of expense. Some examples might include meals, car costs, telephone charges, entertainment, school fees and so on. Now, list the expenses estimated for every month in each one of these categories. You can use past spending records to calculate these costs (see your past bank statements for clues).

Once that has been achieved, it’s best to total all income and all expenses. Then subtract expenses from income to derive the net result. The ideal result will be a positive number; i.e. income will exceed expenses. If this is not the case, then you are losing money and need to take corrective action. If you have a positive result, then you have a surplus and can cover all your expenses.

Concluding our Discussion on Financial Management and Budgeting

Without a budget, it is not easy to work out if everything is tracking according to plan. This is the primary reason people get into debt. Sound financial management strategies always include a budget and the process of creating one is fairly straightforward.. So you could produce one for your family or for your business? It could be the beginning of a financial management strategy for your situation.

Read here for more resources on budgeting.

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