Budgeting helps solve problems in advance. But how? And why? Explore budgets.
- All right let's go back to the beginning. It's the end of September, and we're doing a cash budget for the next four months. We computed that the budgeted amount of cash at the end of October was $14,000. So, we're planning to start November with $14,000. We expect to collect another $10,000 in November, which will give us $24,000, but we expect to spend $60,000 in November. So it looks like we're going to come up $36,000 short in November.
We're going to have to borrow $36,000 in November just to have enough cash to cover our forecasted payments. That's our budget and we made that budget in advance at the end of September. Now November comes along, let's say it's the middle of November, and now we see that we need $36,000. Well there are two ways to live life, business life, and life in general. One way is to carefully plan out a budget like we got here. If we've got a careful budget we already knew that we would need to borrow $36,000 in November.
Okay, fine, we expected that. There's not a catastrophe here. We knew this was coming. We have planned for it. So that's one way to live life, to plan things out on paper, to do budgets so that we can identify tough items in advance. A second way to live life is to never do a budget. Never make a plan, just wake up every morning, and let things come as a complete surprise to you. That's a very exciting way to live life. Now it's a little bit stressful to wake up on the morning of November 17th and say, wow, I have to borrow $36,000 today.
Where's that going to come from? I didn't know that was going to happen. So, if you want to live your life as one exciting unforeseeable adventure after another, by all means, don't make any budgets. Budgets help you see problems in advance. And perhaps solve them in advance before they ever actually happen. In this case, you can go to the bank at the end of September with your cash budget in hand, and begin to make advance arrangements for the mid-November loan. So, how much excitement do you want in your life? If you want to have your excitement in terms of a business surprise every single morning, then don't have any budgets.
So what are the benefits of a cash budget, in particular in this case, and a budget in general? Well, when you budget things, it really means you're running a simulation of how your company is going to operate for the next few months, and you say, well, okay, we need to make advance arrangements for a loan, well before the time when we actually get to the loan. The budget helps us identify and solve problems on paper before they ever happen in the real world. There are huge benefits to budgeting for all organizations, for businesses, and for you and me personally.
- What is accounting?
- Working with balance sheets, income statements, and the statement of cash flows
- Determining the costs of products
- Performing break-even analysis
- Determining your tax rate
- Understanding tax deductions and credits