Integration of company goals with budgeting
As a budget planning tool, managers can anticipate possible problems in the development of a company or business and find ways to solve them. These trends should be predicted in various development scenarios: optimistic, pessimistic, and most likely. Budgets do not prevent unforeseen situations in the future, but budgeting allows you to prepare for their solution.
Budgeting is a derivative of the goals and objectives of the company. Therefore, ensuring the connection of the company’s goals with financial planning and budgeting is an important task in the process of setting budget management in the company. Budgeting goals in a particular company can be determined only after setting the goals of the company and determining the direction of the company’s movement in their business.At the same time, it is difficult to imagine knowledge of the direction of the company’s movement without setting its goals. Finally, in order to understand which way it is necessary to move to achieve your goals, you need to determine a strategy.
For a clear presentation of the goals of the company, it is necessary to determine the prospects for its further development. Since the basic law of business states that a business is created to meet the needs of its owners (shareholders), it is the needs of the owners that determine the direction of development of the company (business).
It is often believed that the strategic goal of the owners is solely to make a profit, but this statement is too straightforward and not always true. So, the main goals of the creation (acquisition) of the company by the owners can be formulated in a variety of ways – some real examples are given.
Appointment of the company from the point of view of the owners Strategic goals of the company
Company as an investment project Increasing profitability or return on investment (ROI)
A company is an asset for resale. Raising its market value for the purpose of selling.
The company is the only source of income for the owner Balanced growth, profit, free cash flow
The company is a manufacturer within the framework of the holding. Production necessary for building the production chain of the holding
Each of these options for the appointment of a company determines a different financial strategy and financial goals, which will be reflected in the nature of budgeting. Without taking into account the mission and strategy, budget management loses a foothold, as the link to real economic activity remains, and the link to the future disappears.
Therefore, when setting budgeting, it is important to understand not only the general purpose of financial planning in a company from the point of view of managerial decision-making, but also what budgeting tasks should be solved within the framework of this particular organization. First of all, we are talking about the main goals of the company, therefore, when setting budgeting, it is necessary:
to formulate the main financial and non-financial goals of the company;
identify tasks aimed at achieving the main goals of the company, which can be solved with the help of budgeting;
identify those indicators with which it will be possible to monitor the achievement of these goals.
Examples of financial goals for a company include:
increase in cash flow;
increase product profitability;
industry leadership in sales per employee;
increase in return on equity.
When setting strategic plans and company goals, it is necessary to define and clearly formulate the following:
target picture (company mission);
targets for its achievement (market share, ROI);
selected strategies (ways to achieve goals);
activities aimed at implementing the strategy;
accepted premises (assumptions about the behavior of customers, competitors, etc.).
All these indicators and goals can be collected in a common table, and then calculate the necessary resources of the company, reflecting them in the budgets.
Further, for various purposes of the company, it will be necessary to determine budgeting goals, which will differ depending on the chosen goals of the company. So, if the main goal of the company is to create a fast-growing business, this will mean a rapid increase in sales, which is usually a growth of more than 30-40% per year, with constant (comparable) prices and assortment.
If the goal of the company’s development is to quickly increase its value, then in this case we can talk about increasing share capital by more than 100% per year.
From the foregoing, it can be concluded that in the first case, one of the main tasks of budgeting will be control over the receivables, while in the second case there will be close attention and liquidity management.
Setting goals for the company should not be limited only by profit indicators. It is necessary to find a compromise between the growth of the company, the level of development and profit. So, when setting the goal of increasing the company’s market share, one should expect that it will have to sacrifice its profitability…