The budgeting process is an essential business function that’s bound to make even the most organized managers stress. What could be more important to the daily operations of the company than its cash flow? Messing up in this field could result in disrupted projects or, at worst, insolvency.
And yet, studies have shown that about half of organizations don’t even have a formally documented budgeting process.
If your organization is taking on some new projects and you need to make sure that the funding stays sufficient, then studying up on the budgeting process is the best next step to take. Find out how to not only keep track of expenses and revenue but also gain more value out of your purchases and procurement process.
What Is a Budgeting Process?
The process of reviewing past budgets and planning budgets for a set period with the goal of forecasting revenue is known as the budgeting process. One doesn’t have to work in business management to know what a budget is. We all work with limited resources, and the practice of planning out and controlling spending in order to get the most out of those resources is important for sustained success.
When deciding on a budget, a business allocates resources to certain company projects and objectives. Controls are put in place to enforce budgeting policies and prevent overspending. We can generally look at three different types of budgets:
- Operating budgets involve both the revenue generated and the expenditures made during daily operations. Employee salaries and benefits are included in this category.
- Capital expenditure involves major purchases like physical properties and equipment. Budget managers consider this category by setting priorities and making decisions to control risks.
- Cash flow is another form of budgeting that looks at the relationship between income and expenses. Specifically, it makes sure that you have enough cash on hand at any time to cover immediate expenditures.
The budgeting process covers all the steps involved in determining and setting a budget, which can include:
- Reviewing past financial quarters and using the data to forecast future expenses and revenues.
- Developing a plan to manage the budget and implementing it. Allocate resources to cover the company’s projects and departments.
- Regularly checking up on progress by monitoring budget levels throughout the quarter.
- Evaluating the performance of the budgeting process in the end and seeing what can be learned.
But we need to go beyond just definitions and look at the role of budgeting in corporate and project management.
The Primary Goals of Budgeting
In addition to the obvious benefit of controlling spending and keeping tabs on financial activities, budgeting is taken seriously because it also:
- Helps with project planning: What happens if market conditions change and the business needs to address problems later down the line? Budgeting is the perfect way to prepare financially.
- Coordinates collaboration: Since the budget impacts everyone, the budgeting process must involve all departments and teams working together for the wellbeing of the overall company as a whole.
- Motivates management: Upper management teams who are aware of budgeting efforts are more likely to understand the goals and initiatives of the business. They are motivated to hold everybody accountable for a stable budget.
- Measures performance: Budgeting forces you to look at the financial figures and determine whether or not you’re meeting your targets. If any cash flow issues arise, you will be able to know early on.
A detailed budget sets realistic goals for your projects and ensures proper resource allocation to prevent costly spending overflows.
Why the Budgeting Process Is Vital
Companies balance their budgets for the same reason individuals do. By keeping track of the timing and amounts of income and expenditures, it’s possible to set realistic goals, track deviations in planning, and enforce corrective action.
Without enough cash, a business cannot sustain itself, but the advantages of the budgeting process are a little more complex than that.
- Setting expectations: Once a budget sets a spending target for a particular project, then the teams can work with those expectations in mind. They can set their own deadlines and allocate resources according to the company’s master budget.
- Aligning resource allocation to the goals of the business: Think about what part of the company deserves more money this quarter. For instance, if product sales are down this month, it may be wise to allocate more of the budget to sales and marketing.
- Facilitating collaboration: Departments should not be siloed. Budgeting is the perfect opportunity to connect the finance teams with the rest of the business. Everyone gets a chance to talk about priorities, expectations, funding, and goals, and the finance department gets to share guidance.
A company with a strong budgeting process in place is also seen as more trustworthy when it comes to third-party partnerships. For instance, if you ever need to borrow a business loan, your lender will likely want to know how well you’ve followed budgets in the past.
How Does One Approach Budget Management?
Budget management cannot be perfected overnight, and neither is it possible to achieve for one person. It requires collaboration among upper management, the finance department, and the various budget and project managers across the company.
A budget can be developed in a top-down approach, where upper management begins the process by looking at business objectives and current resources to prepare a budget plan. It then passes down the responsibility of enforcing this plan to the department managers, who themselves can set their own guidelines based on the overall budget allocation.
Top-down works out in most cases because lower management can save time and effectively hit the ground running since most of the work has been done externally.
Alternatively, budgeting can occur from the bottom-up, essentially an inverse of top-down. Planning begins at the departmental level and goes up; that is, each department prepares its own budget plans and cost estimations, and upper management combines them all into one big, inclusive budget process.
Bottom-up is more time-consuming, but it also results in a more suitable budget since the people who will conduct daily operations and actually spend the money have a larger voice in how resources will be allocated. Each department is also likely to be more motivated to achieve financial goals this way since it was the one who made the budget to begin with.
In a non-business example, New York City famously implemented its own bottom-up strategy known as Participatory Budgeting in the early 2010s. The plan gave control of the public budgeting process to community members.
What Steps Does the Budgeting Process Involve?
Regardless of the approach you take, the next step is to convert the budgeting process into tangible business strategy. Start by determining your budgetary goals (i.e. what you’re trying to achieve with limited resources). Then determine how you will achieve those objectives and track your progress along the way.
- Identify goals: Depending on factors like market dynamics,sales trends, and current resources, a company has different needs regarding its budget and must plan accordingly.
- Look at past data: Take advantage of the existing information you have from last quarter. What did you learn about your last budget that can be used this time around? Were there unanticipated shortfalls in funding? Were the assumptions you made back then still accurate? And how has the market or industry changed since then? Encourage your individual departments to ask themselves these questions.
- Get some tangible numbers out: Getting into the actual figures, identify your income streams, investments, and expenditures. Whether we’re talking about exact numbers or estimates, look for fixed costs (overhead, static costs like rent, mortgage, utilities, salaries, and insurance), variable costs (discretionary fees like software subscriptions, travel costs, and advertising services), and irregular costs (surprise expenses that are difficult to forecast, such as special events and mergers/acquisitions).
- Always have cash flow in mind: Don’t just look at the amounts; look at the timing as well. Is your consistent revenue enough to take care of seasonal, momentary expenditures? Look at cash flow in terms of the money going in at a certain point compared to the money going out.
And don’t forget to revisit your budgeting process regularly. It’s not a one-time consideration, as you will need to check back and update your efforts. Schedule budgetary reviews every quarter so that potential issues are caught in time.
Budgeting Process Techniques and Best Practices
Corporate budgeting is a high-risk activity that even experienced management teams need time to get right. Thankfully, it isn’t too difficult with a bit of practice and an understanding of how the process generally works.
In addition to the above steps, know that budgets will often change with time. Many businesses operate in fluctuating markets where demand goes up and down depending on the month, which are conditions that call for seasonal budgeting. Also, be honest in your estimations. Don’t over-exaggerate sales or expenditures, and be sure to include even small charges like federal and state taxes.
Know the “Why” Behind the Numbers
A budget manager clearly works with a lot of numbers, but have you ever stopped to think about the “why” beyond those numbers? What assumptions is your budget based on, and how would you interpret those numbers?
To illustrate, try to think about the key causes for high expenses the next time you calculate them out. Are you in need of additional staff, hence the increased investment into salaries? Or are your sales teams short on tools, and you need to spend more on marketing initiatives?
On the revenue side of things, remember what products and services you sold to customers that quarter. Did the sales reach your intended goals, or did they fall short and cause cash flow problems early on? Are you able to adjust product pricing accordingly to address the problem, or is there an underlying need for more robust marketing strategies?
A budget is more than just a spreadsheet. It’s a guide to how your operations should be laid out.
Grasp at Key Performance Indicators
The budgeting process is also heavily KPI-based. Think about how resource allocation should reflect the overall goals of your organization. Key performance indicators tie your efforts to those business objectives and keep you going in the right direction as the budgeting process continues.
Some examples of KPIs often used by budgeting teams are:
- Cash flow and expenses
- Employee payroll
- Accounts payable and receivable fees
- Turnover rates
Regardless of which ones you end up using, make them clear and easily measurable to get the most out of them.
Get It Written Down
Planning out the budget needs to be a formal business process, so don’t just leave it a mental roadmap. Have a budget plan written down somewhere so that you may be thorough in your enforcement controls. In fact, successful companies always publish their annual budget documents to be shared throughout the organization for this reason.
While paper or even spreadsheet programs are an option, the most efficient and organized way to go about a budget report is through accounting and procurement software platforms. As requirements change and budgets shift in focus, a flexible and versatile way to manage your funds is essential to staying competitive in today’s market.