A budget is a tool used to plan or forecast a future period of a business. Businesses make or revise their budgets after a specified period, which is usually every year.
These businesses then follow the budget for the rest of the year. At the end of the year, businesses compare the budget with actual performance to check how they have performed.
While budgets are set annually for most businesses, it may be necessary to revise them before the usual annual revisions.
Therefore, businesses must know when they should revise their budgets. A few reasons for businesses to revise their budgets are as below.
When there are cash flow problems
If a business starts having cash flow problems after preparing a budget, then it means the budget needs revision.
A business manages its cash flows according to the budgets made at the start of the period.
If the business cannot regulate its performance according to the budgeted expectations and starts having cash flow problems, then it means that the budget is unrealistic.
Therefore, in these conditions, the budget must be revised to reflect more realistic expectations and to stop the cash flow problem from spreading to other parts of the business.
When there are changes in environmental factors
When a business makes budgets for its future periods, it considers all its environmental factors. These factors include political, economic, social, technological, ecological, and legal factors.
After a business prepares its budget, if it believes there are significant changes in its environmental factors, then it should revise its budget.
If it ignores these changes, the business can experience significant variances in the future them.
When there are changes in internal factors
Similar to environmental factors, when a business makes budgets, it also considers all its internal factors.
These factors include types of processes, types of expenses, efficiencies, etc. within the business.
The budget of the business will be affected if there are significant changes in its internal factors. For example, if a process within the business changes resulting in extra or fewer steps taken to complete, then it is likely going to affect the costs related to the process as well.
Therefore, the business must revise its budgets if there are any internal factors change.
When the goals of a business change
Businesses make budgets with specific goals in mind. This may happen often in startups or businesses that work on different contracts.
For example, for one contract the goal of the business may be to focus on profitability; for another, the goal may be to ensure quality regardless of costs.
In circumstances where the goals of a business change, the business should revise its budget to reflect its latest goals.
Conclusion
A budget is a forecast or plan for the future of the business. Usually, businesses revise their budgets after a specific period, which for most businesses is at the end of each year.
There are several reasons why a business may consider amending its budget. These reasons include cash flow problems, changes in environmental factors, internal factors, or when the goals of the business change.
