Business Budgeting Process is an effective tool in the management of any business and it is a comprehensive working plan. It can help you design your financial future, make economic choices, as well as control and evaluate your activity. This may very well be true, but it is also important to note that having a good and clear concept of budgeting will help in making the construction and administration of the budget less of a problem. So in this post, let me show you the process you need to follow when preparing a budget for your business.
Contents
Planning and Forecasting
The process of budgeting is divided into stages, the first of which is planning and forecasting. It is a method of using the prior year’s financial performance, the current income and expenditure, and future planning to predict the company’s revenues and expenses for the subsequent budget period. Some key aspects of the planning process include:
Review Historical Data
It is helpful to analyze your performance data for the previous 3-5 years in terms of sales, profit margins, and costs to gain an understanding of trends, seasonal variation, and performance standards. This provides you with a proper forecast based on which such estimates can be made.
Set Objectives
Establish the financial planning and operational goals of your business for the following year according to your growth plans and what will be required to realize the set goals. They may contain objectives like generating specific sales revenue by the end of the year or specific cost savings in a given period.
Make Projections
Use historical data and information from the industry as well as your future goals and growth plan to estimate future income and expenses. Refer to the predicted changes that are to be built into your model – a new product line, wider marketing, rate increases, etc. You have to consider the best-case and worst-case scenarios.
The actual construction of the budget begins with having precise estimates of how much of your revenues you hope to generate, your operational expenses, capital expenditures, etc.
Determine Budget Timeline
Once you have forecasted all the budget line items, the next step is to develop your budgeting timeline. Normally, the overall corporate budget is created for the fiscal year based on either the calendar year, which ranges from January to December or the fiscal year. Specific consideration should be given to:
- Budget Deadline: The last approved budget needs to be ready when? This means that sufficient time should be provided for preparing budgets, sourcing for inputs, and revising budgets where necessary.
- Period to Be Covered: On the same, define the specific number of months your budget will span from – one year, half year, quarterly, etc. This span should follow the reporting period of the business.
- Budget Kickoff: When will /Should budget owners start developing their respective departmental budgets? It should take about 2-3 months for the respective teams to go through the budgeting process before the final budget is submitted.
Ensure that everyone is informed and has expectations about the process of budget formation, reviews, and approvals to set proper deadlines.
Develop Departmental Budgets
With top-down targets defined, departments now create their detailed budgets for the upcoming period:
Gather Inputs
Provide all the department heads with the budget worksheets several weeks before the budgets are required. Explain the principles of forecasting, factors that lead to its growth, and assumptions on costs.
Review Staffing Needs
Managers should be able to decide on which staff should be hired, the workload and activities that they should be assigned to, and the salary that should be given to them. Ensure that in your forecasts, you consider the changes in the number of employees you have intended to hire or those you plan to let go in the near future.
Estimate Expenses
Departments should prepare their price estimates of the fundamental materials, frequently bought goods and materials, regular services, transportation and other necessities Secondarily, one-time or extraordinary special projects should be listed separately.
Meet with Management
The goals and objectives of each activity for each financial year must be reviewed and explained in every draft budget to ensure consistency of the budget with the overall business strategy and to identify and address any issues related to assumptions in the budget.
Preparing detailed budgets for all operating units and activity areas helps to get a clear picture of organizational costs.
Consolidate the Master Budget
After coordinating and getting the final approval of the various departmental budgets, the finance team compiles them into what is known as an organizational master budget. Common elements include:
Operating Budget – combines projected revenues and expenses for core business operations, including:
- Revenue Budget – A revenue budget refers to the budgeted sales and other income that is expected to be earned during the specific accounting period.
- Costs that will be incurred throughout the production process, Research and Development, staff wages, accommodation and energy costs, etc.
Finalize the Budget
The drafted budget then goes through several follow-up steps before being formally approved:
- Budget Committee Review: The executive committee reviews and analyses budget proposals for logical consistency and evaluates the impacts of various plans and their implications for profits, cash flows, etc. to arrive at the final budget objectives.
- Departmental Discussions: I again get in touch with individual departments to explain the final amount of money that they have for expenses or to discuss the gaps.
- Executive Approval: While the preparation of the final annual master budget can be done by any employee of the organization, the approval must be given by the Board of Directors or C-level management.
- Publish and Disseminate: These numbers are presented formally as approved budgets to the departmental heads to be used as a measure/benchmark for the year. It may be given that certain standards are issued for spending targets that are particular to certain line items or projects.
Monitoring and Controlling
The most critical aspect of budgeting is tracking actual spending versus your plans on an ongoing basis:
Set Up Reporting
Implement ways to gather all revenue and expense information within the required timeframe across various business processes – in the best case, using software for budgeting.
Analyze Variances
Check actual usage against budget plans on a monthly/quarterly basis and identify and evaluate large deviations. Draw distinctions between them – on one side, planning is too inaccurate and on the other side, the business evolves and has new demands.
Take Corrective Action
Modify the activities where necessary to ensure they fit within the intended learning process. For costs that are below the budget – look at how it is possible to better control the costs. For revenues over this norm – evaluate the opportunities to undertake additional growth activities.
Refine Budgets
Integrate variances into next year’s and sub-sequentially coming years’ improved budgeting system. Some of the key areas of flexibility are discussed below: Semi-annual or annual budgets might have to be adjusted during the middle of the year if significant disturbances to business operations occur or new prospects are identified.
By adhering to this usual approach in budget planning, development, approval, and monitoring, it becomes easy to ensure that the business side of your organization is in tune with the realities of an ever-growing financial need for your business. Never should the budget be locked away and used only as a compliance tool, but it should be continuously evaluated for its efficiency. Budgeting is a vital tool for managing the financial resources of an enterprise since it determines the business decisions that can be made based on profitability.
Conclusion
Budgeting is an efficient approach that enables you to easily predict your revenues and costs, achieve strategic insights, and be a significant instrument for business progress. When it comes to budgeting, is a process that calls for cooperation from the entire organization, and when one follows certain steps of how to align the budget with the strategic goals and objectives, fewer mistakes are made when monitoring the financial performance.
The need for planning cannot be overemphasized; key aspects of budgeting include looking at past results, being completely honest about the organization’s current position, getting agreement from all departments, and maintaining control over variances. Budget and actual linking technologies offer quick constructive feedback to balance the double.
Technology solutions, that link budgets to actuals, enable faster constructive feedback. Efficient use of available funds allows the realization of specific strategies for expanding successful business under the viewpoint of future profit-making.
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