Operating a business without a financial plan is like racing in the Indy 500 without a helmet. Lack of a budget makes your business vulnerable, and it might fail to survive a financial hit. Budgeting is important, reports Bloomberg Businessweek, because it allows business owners to measure financial health, gauge progress and recognize investment opportunities. If you're interested in learning about business budgeting, an operating budget and an activities based budget are two methods to explore.
An activities based budget is built around specific needs and events. For example, a shoe company might decide to produce a new brand of shoe. If the company uses an activities based budget, then the business sets aside a specific amount of money for the new shoe's production. Compare that to an operating budget, which focuses on maintaining current revenue and expenses over a 12-month period. Consider the shoe company from the previous example. If the company uses an operating budget, the focus is on having enough money to sustain current shoe production and revenue from shoe sales. The company may or may not have money in the budget to produce the new shoe, but it does not set aside a specific amount of money for the project.
"Accounting Best Practices" states an activities based budget is often a better alternative to a traditional operating budget. Businesses might find an operating budget based on existing revenues and expenses too restrictive. Little room remains for exploring new opportunities and making improvements. An activities based budget makes it easier to see which events or departments are profitable or wasteful. With that information in hand, management can reduce or increase spending where necessary.
Unlike an activities based budget, an operating budget requires a separate financial budget. An activities based budget is close to a combination operating budget and financial budget. It includes information about which activities require money, what purpose the money serves and where the money comes from. An operating budget outlines plans for maintaining current operations -- but it's the financial budget that provides detail about where the money comes from to maintain operations and possibly pursue new projects.
According to Bloomberg Businessweek, it's common for entrepreneurs to create a budget when applying for a loan or preparing taxes. After the goal is achieved, the budget is put aside and never consulted again. Forgetting about the budget is a mistake because it should serve as a map for the business. The purpose of a budget is to help business owners keep the business on track. If you're unsure about how to prepare a business budget, you might want to consult a certified public accountant for assistance.
- "Bloomberg Businessweek"; Better Business Through Budgeting; Karen E. Klein; 2006
- The Free Dictionary by Farlex: Activity Based Budgeting
- "Accounting Best Practices"; Steven M. Bragg; 2010
- "The Portable MBA in Finance and Accounting"; Theodore Grossman, John Leslie Livingstone; 2009
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