By Christian Oswaldo Morán
During the critical months of the pandemic, a situation that could have affected households was the concern about uncertainty, an uncertainty that had many dimensions, health, work, education, food and most probably some others, and surely this concern in households was shared by many actors in the Ecuadorian economy.
The uncertainty was based on how the organization, management and administration of 4 specific issues would be: 1) Income 2) expenditures 3) The interaction of the first two over time 4) The changes that could be generated from the interaction of income and expenditures over time, i.e., the sensitivity or changes in either of the two (income and expenditures).
One answer to this uncertainty could be that all the members of the family nucleus reach an agreement that a plan must be made to guarantee that the basic needs of all the members of the family team are satisfied. It is recommended that the “Family Budget” be reconsidered. In such a way that the family objectives can be achieved at least while the confinement and restrictions are in force.
Thus, we planned and managed the family's income and expenses as if we were going through a “war” economy (and the global situation was not far from that).
This uncertainty was not only in the family, but also in the entire national and international conglomerate, where volatility due to speculation and the fall in prices of the main financial indicators was a daily dynamic.
Therefore, the tool that helps to plan resources is the “budget”, which should be considered as a management, planning and projection tool, where its users can quantify the forecasts of companies, families or the state.
Time, economic and financial resources are limited, and just as important as the management of the household budget is, it is also important for companies that find in the budget a tool to help them achieve an optimal performance and use of present and future resources. For the company, knowing the resources that are going to come in and what they are going to spend, optimizes all the operations to be carried out.
Many people in different positions in the company may think that the budget developer is going to restrict investments, operations, or margins of maneuver, however, this is not the case, for sure, the budget developer is looking for some or all of these situations below:
1) Organize financial resources.
2) Search for reference points.
3) Measure the quality and periodicity of expenses and, of course, unnecessary expenses.
4) Measure the periodicity of revenues and revenue optimization.
5) Minimize risks by measuring volatilities and sensitivities.
6) Measure results and whether the company's objectives have been met.
7) Establish short, medium and long term priorities.
8) Comprehensive planning.
9) Improve the company's competitiveness.
10) Prioritizes areas requiring attention, resources and corrective actions.
Good budget planning and execution generates added value because it shows in advance the income and expenses at certain future moments of the company, which allows to organize the action plan to be taken, comparing what was initially budgeted with what was actually executed.
To make a budget, the criteria to follow are:
- Have clear company development objectives.
- Have management approval.
- Share the budget with the stakeholders.
- Correct estimation of revenues and income.
- Estimate budget sensitivities, scenarios and volatilities.
- Execute budget execution in a coordinated manner.
- Directing and evaluating.
Of course, if we do not comply with any of these stages, it is very likely that the development objectives foreseen by the company will not be met and, in fact, this is the starting point for the fact that the budget has limitations, one of the biggest of which is poor budgeting, i.e. not considering the deviations of income and revenues, nor that the objectives set can be measurable or referential.
How do we know that our budget is correctly executed and that its management was successful, because if it generated value for the company, the budget fulfilled its objective.
So, no matter if we are faced with a family or business economy, having a tool to help us organize, manage and administer our financial resources is essential, especially in times of crisis, in these times where we rethink objectives and goals, where planning and optimization are essential. The use of the budget as a financial control tool is recommended.
As a recommendation I could add that, if you did not budget your income and expenses before, it is time to do so and start today as you begin a month and the second half of the year.
Recommended reading:
Lawrence Gitman, (2013). Principles of financial management.
James C. VanHorne, (2010). Fundamentals of financial management.
Ross, Westerfield, Jaffe, (2012). Corporate finance
Diaz, Parra, López, (2012). Budgeting, an approach to financial planning.
