Any business will eat up resources. Actual expenditures are compared against budgeted expenditures. Monthly and annual expenditure comparisons must be made for both control and flexibility purposes. It is the only way critical decisions and corrective actions can be planned and then taken. If the owner-manager is constantly putting out fires, monthly comparisons are not being made nor are timely corrective actions being taken.
Corrective action is taken when expenses are over budget.
Most small businesses get into financial trouble because they do the right thing too late. Taking timely corrective action is the mark of an effective business owner-manager. Owner prepares budget. An excellent budget prepared by an employee or accountant is virtually useless if the owner is not committed to it. Budget preparation educates the owner to the realities of the business.