The budget provides the financial planning detail for every aspect of the business e.g. employee costs, rent, IT investments, machinery costs, sales value , direct material costs, shipping and freight charges, etc. The ultimate target that should result from the budget is the budgeted net profit. It is a key tool for operating the business, and by facilitating comparison of actual performance versus budgeted performance, it highlights the operating VARIANCES to management.
The budgeted net profit, after taxation, when expressed as a percentage of the net investment in the business, gives the Return On Investment - ROI - the single most important piece of financial data and the reason for being in business in the first place.
- Prepare a detailed budget
- Plan periodical reviews of actual performance against budget
- Prepare a corrective action plan for the variances that will inevitably occur
- Set the basis for the Return on Investment you wish the business to give you