BUDGET
A budget estimates a project or company's projected income and expenses over a specified period. It allows for efficient management and allocation of resources, ensuring that objectives are met without exceeding financial limits.
The last quarter of each fiscal year in Costa Rica is an excellent time to plan our 2025 budget, as we have nine months of financial data and a broader understanding of future challenges.
As January 2025 begins, successful businesses already know the revenue targets they need to hit—whether it’s 10 million or 200 million in sales. The next step is to make the best use of that cash flow, control fixed and variable costs, and anticipate profit both before and after taxes. Keep in mind that by December 2025, the profit before taxes should be at least between 6% and 20%.
Is a Budget Necessary?
The benefits of a good budgeting process are essential for the success of any project or business. Here are some of the key benefits:
Better Financial Control A well-planned budget allows for monitoring and controlling expenses, ensuring that available funds are not exceeded. Forecasting future costs helps avoid financial surprises.
Informed Decision-Making By having clarity on available resources and estimated costs, managers and project leaders can make better decisions regarding investments, expansions, or adjustments to the project.
Efficient Resource Allocation A budget allows for the efficient allocation of resources, ensuring that each area of the project or company receives the necessary funds based on its priority and needs.
Cost Overrun Prevention By planning costs, the risk of unexpected overruns is minimized, which could otherwise jeopardize the project's success or the company's financial stability.
Facilitates Performance Evaluation A budget provides a benchmark for evaluating the financial performance of the project or company. Comparing actual results with the budget makes identifying deviations and correcting errors in time easier.
Improved Long-Term Planning Budgeting helps businesses and projects plan better in the long term. Annual or multi-year budgets help identify financial and operational goals for the future, aligning with long-term objectives.
Better Internal Communication A clear and transparent budget improves communication between different departments and teams of a project or business, as everyone understands the financial constraints and goals they need to achieve.
Profitability Optimization By following a well-designed budget, companies can maximize revenues and minimize costs, leading to greater profitability and financial stability.
Risk Mitigation A reasonable budget includes a contingency reserve, which allows for mitigating unexpected risks such as market fluctuations, additional costs, or changes in the operating environment.
Facilitates Financing Investors or financial institutions often require well-prepared budgets to assess the feasibility of a project or business before granting loans or financing. A solid budget increases the project's credibility with potential funding sources.
Best Practices for Budgets
Clearly Define Project Scope Ensure all stakeholders understand what is included and not included in the project to avoid unexpected costs.
Use Tracking Tools Implement financial management software to monitor expenses and income in real-time.
Maintain a Contingency Reserve Always keep a reserve fund to handle unexpected events that may arise during project execution.
Involve All Departments Every business area or project team should be involved in creating the budget to ensure that all needs are considered.
Regularly Review Conduct regular reviews to ensure the project is progressing as planned and adjust strategies if necessary.
Anticipate External Factors Consider possible changes in the economic environment, such as inflation, exchange rate fluctuations, or regulatory changes, that may impact the budget.
Budget Process
Planning
- Define the project or company objectives.
- Determine available resources (capital, time, personnel).
- Identify income sources (sales, investments, financing).
Cost Estimation
- Break down the project into parts or phases.
- Estimate direct costs (materials, labor) and indirect costs (rent, utilities).
- Assign costs to each phase of the project or expense line.
Review
- Evaluate the feasibility of the proposed budget.
- Adjust estimates to ensure they are realistic and achievable.
- Assess if additional financing is required.
Approval
- Obtain approval from all stakeholders.
- Ensure consensus on the scope of the budget and its intended use.
Monitoring and Control
- Closely follow budget execution, comparing actual expenses with those planned.
- Adjust the budget when significant deviations occur.
Closing
- Assess financial performance at the end of the period.
- Identify areas for improvement in future budgets.