It's the beginning of a new year for the majority of companies, making it the ideal time to begin planning for the current year. It is impossible to overstate the importance of government fiscal and monetary policies in every economy since they determine the economic activities of both individuals and companies. Today, we'll look at how to match spending plans with governmental fiscal policies, one of the key considerations for companies when preparing their budget.
Setting a realistic budget involves more than just planning for revenue and expenses and studying the previous year's financial results. When developing a budget that takes into account monetary and fiscal policies of the government, it is crucial to also take into account industry developments.
What is a budget?
Budgeting is the act of making a plan for how you will spend your money, but it can also be explained more simply as the financial plan of the company that represents its goals and how it plans to reach them. The budget should also account for changes in plans, such as new goods, services, or policy changes, in order to develop a feasible model for the year. An annual budget involves more than simply money. An organisation can achieve its objectives by using a working budget to prepare for expenditure and change.
Budgeting is a crucial component of effective business management because it enables companies to compare their revenues and costs, which have an impact on their operations, strategies, and decision-making.
What are fiscal policies?
According to Investopedia, fiscal policy refers to the use of government spending and tax policies to influence economic conditions, especially macroeconomic conditions, including aggregate demand for goods and services, employment, inflation, and economic growth.
Most often, monetary, and fiscal policies are employed in tandem to affect the trajectory of the economy and achieve economic objectives. However, monetary policies are actions taken by the central bank of an economy with the aim of regulating the amount of money available to individuals and the private sector, whereas the government can have an impact on the economy using two types of fiscal policy tools, known as expansionary and contractionary policies. Although monetary and fiscal policies control the economy's wealth distribution in tandem, they carry out their separate functions via various channels. Therefore, if there is no agreement between the government and central bank, both policies may conflict.
To implement an expansionary policy, the government might need to borrow. It increases the budget deficit and might raise interest rates, discouraging people and businesses from taking out loans or making investments.
What does this mean for businesses?
Expansionary policies essentially mean that the government increases spending and lowers taxes, whereas contractionary policies illustrate a scenario in which the government decreases expenditure and raises taxes to control aggregate demand.
Expansionary policies are used to improve aggregate demand, stimulate spending as disposable income rises, and also boost the economy through the infrastructure development while contractionary policies are typically used when the government has to lower its deficit position.
Taxation - This is one method the government uses to raise money to fund projects. When an expansionary policy is implemented, businesses benefit because demand capacity grows, the business is able to invest in several projects and the economy is strong. Conversaly, when a contractionary policy is implemented, the business is impacted by a decline in overall demand and limitations on investment activity.
Employment - Infrastructure projects like highways, roads, water systems, and parastatals are other ways that the government may have an impact on the economy. Building infrastructure creates employment opportunities since it requires extensive recruiting and a wide range of project types. Consequently, the unemployment rate will decline, and this will have a multiplier effect on the economy on all fronts as the cyclical flow is given increased income and demand infusions.
In general, fiscal policy can be used to address economic imbalances during recessionary and depressive periods.
How can companies align their spending to government fiscal policies?
A company's overall spending is influenced by its size and organisational structure. However, they need to align their budgets and financial plans with government fiscal policies.
Investments - One of the primary ways that businesses expand is via investing. However, depending on the status of the economy and the fiscal policies in place, businesses may plan to include numerous investment projects, or they may limit the risk of investing in specific areas.
Shareholders profits - Shareholder’s profit is expected to increase and be paid out quickly when a company expands and generates more revenue. However, if the fiscal policy is unfavourable, it will be wise to take into account when preparing the annual budget how much and when the profits will be distributed to shareholders.
Allocation of resources- To prevent a budget plan that is either insufficient or excessive, businesses may need to be cautious when calculating their resource allocation ratio.
In summary, a company should examine how the government's fiscal policies affect its financial plans while preparing a budget. It is important to take into account fiscal policy changes and the potential effects they may have on business operations.
Our financial advisory specialist team can work with you and your business to prepare your 2023 budget to give your business a strong head-start into the year. Email us at: enquiries@ovacgroup.com for a free consultation with our team specialists.