I think one of the most compelling arguments for building a budget is that when you create a budget you’re also creating a model of your business.  A model that enables you to evaluate alternative “what if” scenarios.  The “what if” technique, commonly referred to as sensitivity analysis, allows the organization to see the consequences of using different assumptions and the impact thereof.

Creating a budget model and engaging in sensitivity analysis not only helps the organization evaluate different alternatives, it also helps management understand the dynamics of the business.  For example, plug in a 5% increase in sales and see that impact on the balance sheet, net income and cash flow.  Without the model the impact, one would only be able to assume that the impact would be positive. 

Building a model of your business in spreadsheet software with an integrated balance sheet, income statement and cash flow is a daunting task.  That’s why most business don’t even try.