In a business organization, finance, production, and marketing are the main functions that must be effectively performed for the smooth running of a business. Finance is a paramount function of a business as it deals with fundraising to activate other functions and judicious utilization of the fund for the satisfaction of business shareholders’ interest.
In performing the business finance function a business could raise funds by selling shares or borrowing from external sources and could make use of both. The most important thing is making effective use of the fund by taking advantage of investment projects. To make effective decisions on investment projects, business budgeting is a prerequisite.
Business budgeting is simply the process of planning, considering investment opportunities, creating investment details, and setting financial goals for informed investment decision-making. Business budgeting involves both capital budgeting and Investment budgeting and a business would choose the appropriate one depending on the lifespan of the Investment project. Business budgeting is very important to business growth and stability in many ways which include:
1. Enhance effective decision-making
Business budgeting creates an avenue for a business to dissect various available investment projects. This involves estimating the cost and benefits of each project, estimating the risks and uncertainties of the project as well as the time the project would mature to pay back. Having this kind of evaluation of different investment projects helps organizations prioritize projects that are likely to generate the highest return on investment with minimum and bearable risk. Therefore, business budgeting helps in making effective investment decisions.
2. Effective allocation of funds
Business budgeting allows the business to compare different projects both long-term and short-term project. by so doing, it facilitates better allocation of funds to profitable projects. Long-term projects can be financed with long-term capital or loans and short-term projects can be financed with short-term capital, business budgeting helps to identify the payback period of a particular project to know the type of financing approach to be adopted.
3. Profitability
The motive of every business is to make a profit and pay significant returns to its investors and lenders. Estimating investment projects helps to make better decisions in choosing the project a business should go for based on return and risk. This helps to reduce loss and increase the probability of a business.
4. Effective cash flow management
Business budgeting can help organizations identify the perspective of inflow and outflow of the business cash. It helps the business to identify areas where expenses can be reduced which can free up cash for other purposes. In larger part, it helps businesses to make better decisions on their spending to maximize returns with minimum risk.
5. increase business valuation
Budgeting e.g. investment budgeting and capital budgeting helps to catch profitable Investment both on a long-term and short-term basis. A business that can achieve profitable investment will meet the target dividend of shareholders and this increases the valuation of the business.
Business budgeting is a tool for meeting the financial goals of a business on long-term and short-term plans. It is very crucial, especially for investment companies and businesses that deal with financial markets.
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