that, we as a company should have a firm understanding of the cost objects that are prevalent in our current setup, so that we can confidently answer questions asked by the bank’s personnel, and most importantly we need to determine how much capital our expanding operations need.
By preparing an internal company budget, we will not only know the underlying cost objects in a process, but also we will know the cost each object is incurring. By knowing these facts we will be in a better position to undertake cost reduction strategies and optimize our capital allocation process. Since these are tough economic times, and we need to be sure that every penny that we are investing in our operations is producing a substantial return, therefore, it is important that we take an initiative to generate an internal company budget.
The utility of this internal budget is immense. We can use this internal budget to construct a master budget for the lending bank. In this way, we will be able to send a firm message across to the bank, and show them that we are serious in doing business with them. By presenting them with the nature of our operational costs, we can enchant them with the opportunity to do future business with our company. Most importantly, this effort of ours to compile an internal budget and tailor it for external users has a broader utility that will arise as the company grows. This utility that is being referred to is the need to have well maintained books in order to change the status of the company. Since we are expecting growth in our business operations and scope of our activities, therefore, it is hard to undermine the fact that we will have to go public someday. For this it is important that the company take an initiative to put in place proper systems for tracing costs and allocation of budget. By installing these systems, we will be in a stronger position to generate true financial statements.