Budget Implementing a Budgeting Process

¶ … Budget

Implementing a Budgeting Process

Budgeting Process is more than an exercise in estimating numbers for its own sake. It is about strategic planning, which involves identifying business goals and objectives and mapping out in tangible terms how those goals will be accomplished over time. This allows for a way to measure results against those goals and identify ways to adjust variables in order to better control outcomes. A budget is the instrument that identifies your income and outflows and how these should align in order to achieve the company's targets. It is obvious, then, that the goals of the organization must be clearly specified prior to implementing a budget plan. For instance, this year's goal might be a 10% increase in gross revenues and a 4% overall increase in profit margin. There are many ways to accomplish this, such as an increase in advertising spending, a switch to a less expensive supplier, or a capital investment back into the business itself to improve service and/or product.

Designing and implementing a budget is not as arduous and time consuming as one may think. First, it is important to identify basic data requirements. The Chart of Accounts is a useful benchmark, as the general ledger will contain most of the information that is needed to outline the line items for the organization in fiscal terms. Fiscal calendars, seasonality, and special timelines should be taken into consideration. The prior year's income statement and balance sheet can be a good starting point to assess the prior years' performance and set goals in accordance with future expectations.

In addition, a simple format should be established for populating this information. In the process of strategic planning, one must decide whether budgeting will be implemented from the "top down," i.e., by senior management, or with input from key employees. Who will be held accountable for the budget? How often does it make sense to conduct variance analysis? To revise the numbers? Once these questions have been answered, it is important to put into writing in the form of a manual the format, deadlines, and accountabilities associated with defining the budgeting process. The format must meet proper business requirements, i.e., for government and local agencies and fiscal authorities. Accurate records must be available to support reported numbers.

It is important to distinguish between an operational budget and a cash flow budget and how revenues, receipts, expenses and disbursements are treated accordingly. In addition, it is important to understand distinctions between assets and liabilities, different types of assets (long-term and short-term), how they can be purchased, and when they are reported as depreciation or a capital outlay and why. In addition to understanding what expenses and receipts for each day (income statement), considering the businesses' balance sheet will help provide a big picture of the organization's financial position both now and in the near future (1-5 years generally). This allows for adjustments to me made to spending and other activities in a more pro-active manner, allowing funds to be utilized in a way that supports the organization's goals and objectives.

Cash Flows

Understanding the amount of cash that comes in and goes out of your company is one of the most critical steps in the budget planning process, because it provides an immediate view of how money is spent and if receipts are timely enough to cover expenses. For instance, Is the company taking advantage of vendor discounts by paying invoices earlier, or are too many customers paying on credit causing the firm to hold off on paying some of its own vendors, thereby losing discounts that can add up over time. Are visits to customers scheduled so that sales staff are available to customers at all times in the showroom? Are the full time carpenters sufficient to handle timely output? Would one additional full time person be more financially beneficial than using four on-call contractors?

Income can be categorized as point of sale or accounts receivable. Expenses can be categorized as fixed (insurance, rent, etc.) and variable (supplies, utilities, etc.). Everything that is paid out each month should be included, factoring in for taxes and other items that don't necessarily occur each and every month. Just organizing the data in this fashion may reveal immediate areas of action, like lagging receivables or expenses in a particular category that are out of scope. One of the first steps usually involved is that once everything is laid out in writing, it is time to review the list and decide where to adjust accordingly.

Variance Analysis

Once the groundwork has been laid and a tangible budget has been formulated, it is important to conduct variance analysis on a regular periodic basis to compare the actuals to the originally budgeted version of events. One could start with the big picture view, analyzing the variance to goals for the company as a whole. This analysis can be conducted on a category rather than a line item basis - for instance, expenditures can be viewed as supplies or salaries. It is a good idea to set a flag for any category, for instance, if year to date sales or expenses vary from budget by more than 10%, then the line item can be investigated further. For example, if supplies is running 15% over budget target, one can investigate the sub-categories for supplies in the chart of accounts, and find out that the expenditure was due to a need to replace a printer in the second quarter unexpectedly, or instead a particular area could be overspending on supplies in general, revealing an increase in the cost of goods sold. This could result in evaluating suppliers and making changes or negotiating better volume discounts. Without a budget plan that is monitored, it will be hard to capture, correct or understand whether the company is running on target.