Budgeting is most often thought of as having to do with the planning and control of revenues and expenses—that is, managing the day-to-day operations of a business or other organization. The primary goal of a business, as Peter Drucker says, is “to create customers” with the right product and price and to skillfully manage costs so as to make a profit. Profit and loss budgets, therefore, get the most attention because that is where the action is.
As a consequence, in many businesses, the balance sheet is like a stepchild left to his own devices on the theory that, if the household is run efficiently, he will somehow grow straight and strong. Also, if I may stretch the simile a bit further, he only gets attention when he gets sick or fails to do his chores.
Thus, many firms that are dedicated to an operating budget pay scant attention to the balance sheet and more or less let the assets and liabilities fall where they may. Many a neglected balance sheet grows strong anyway, but it is always at the cost of some profit and of the incurring of extra risk. The balance-sheet budget is a logical supplement to an operating budget, and its benefits, though less apparent, are more profound and lasting.
PURPOSE OF THE BALANCE-SHEET BUDGET
The purpose of the balance-sheet budget is to help management plan a mix of assets, liabilities, and equity that will:
- Permit an uninhibited operation of the business with the least ...