Budgeting Process

Budgeting Process

Memo

To:                  Budget Managers

From:          

Date:                  November 15, 2013

Re:                  Budgeting Process

Introduction

According to investopedia.com, a budget is defined as an “estimation of the revenue and expenses over a specified future period of time.  A budget is a microeconomic concept that shows the tradeoff made when one good is exchanged for another”.^[1]  A budget is much more than this simple definition.  The impacts of poorly managed budgets can be astronomical.  Poor budgeting can lead to job loss, opportunity lost and even more devastating, the complete failure of a company’s survival.  When done properly, budgeting can serve as a planning and controlling system.^[2] 

Budgeting Process

The goals of any organization will involve accurate documentation of performance that is periodically reviewed to ensure adherence to budgets and to make adjustments if necessary.  The most important part of the budgeting process is planning.  Correctly prepared budgets include forecasting based on the company’s current financial condition, assets, while incorporating both internal and external future trends.  Planning should begin by reviewing the company’s mission and goals.  It is vital that these are part of the process as it provides direction to budget managers and employees.  It is important to maintain profitability (in a profit based business) and allow for growth and reinvestment in company resources to achieve future goals.

Budget Pitfalls

There are many pitfalls that may be encountered throughout the tedious budgeting process.  Of these, the most important to address is the “use it or lose it” process that many companies face.  This problem is best defined as when a department obtains the largest budget possible and ends up with a surplus.  As the fiscal year comes to a close, we se increased spending and a “rush” to end the year with a balanced budget.  This “rushed” spending is often used on frivolous purchases and on many things that are not needed.^[3]  This causes a great burden on the rest of the company.  There are departments that need more funding, some that need less, and as a whole the entire company can “tighten the ship” to ensure we have a profitable year with many years ahead.

Alternative Budgeting

As we move into a new year of budgets it is important that there is a new focus.  This new focus will be to implement new, alternative ways to create a budget that is not only “company” and “department” friendly, but also holds the budget managers and their teams accountable.  There are several alternatives to the budgeting processes of the past, which should be followed.

1. Review the Company’s Core Mission

When beginning to develop the budgets for the upcoming fiscal year, take a pause to review our company mission.  It is important to completely understand the company values, goals and strategies that serve as the key components of the budget and the successful future of the company.^[4]  If any item in the budget does not support they overall goals of the company, it should be questioned.