Budgeting process

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What is the budget? What is a budgeting process?b2

A budget is a very well known term used in the business world. What does it actually mean and why is it so important as everybody is saying?

The budget is the formalized plan of what you intent to do with your available resources in the next business period(s). This plan is based on certain assumptions and actions about the business development. A budget is a yardstick against you benchmark what has happened and try to understand what to do different in order to avoid the unplanned. The way you create your budget is called a budgeting process and it can be at the same time very simple or extremely complex.

Why do I need any budget?

In any kind of business, the future outcome of your business actions is highly volatile and unknown. Therefore the best you can do about the future is to try to define some assumptions that are based on solid and rational facts and actions. By defining some assumptions about the future you are defining some degree of predictability through your underlining planned actions.

So why do we need a budget? Allow me a short detour. Any business endeavor is prone to uncertainty and therefore to risks. Any business owner wants to have minimal exposure to risk uncertainty. A business is kick-started by some financial resources that are coming from different sources. It is a proven and accepted fact that resources are limited.

Coming back to the question “Why do I do I need a budget ?”, a budget is needed to try to avoid as much as possible unwanted risks, have a maximal usage of available resources and have a consistent plan of what we intend to do in the near future with our business.

Budget components

When you are using a budget you are focusing mainly on the following statements :

(1) Profit & Loss statement

(2) Balance Sheet

(3) Cash Flow 

Every single statement can be broken down further into smaller pieces that consolidate into the big picture. The more detailed you go with the details the more confident you are with the outcome of your budget. The more detailed you go with the information the more complex your budgeting process becomes. In this case, you have to find the right balance between effort versus benefits. You should not invest more effort into the budgeting process that really needed. To find the right balance is not very easy but for a first approach, a common sound and healthy judgment should be enough to determine the right balance between effort and benefits. Keep in mind that very often your budgeting assumptions will change and that you’ll have to do budget assumptions and budget revision.

images (2)Important steps in the budgeting process

There are several different ways to approach a budget, I’ll try to present the most important steps :

(1) define your business strategy and your strategic and business goals for the budgeting period

(2) define an write down your budgeting assumptions with as many details as possible

(3) define a budgeting timeline and assign clear responsibility for the provided data

(4) gather your primary information as good and as complete as possible

(5) define and communicate through your organization the budgeting process templates and timelines, make sure that everybody involved is on the same page

(6) get a 1-st draft of the budget

(7) review your budget assumptions

(8) review your budget and issue the final version

(9) get everyone committed to the final version of the budget by communicating and distributing the final version

(10) do a gap analysis after the 1-st period of your budget

(11) adjust budget ( rolling forecast ) and take actions based on (10)

(12)  repeat points (10) and (11)

What is a budget good for?

Use your budget as a red line expressed in numbers of your business ideas. USE and LIVE your budget otherwise, don’t bother in doing the effort.

The budget is there to help you if it doesn’t do that then you’re doing something totally wrong.

Because a budget is a lot of work and means a  lot of effort it is highly advisable to not take it easy and do it based on very rough estimations, in this case, it is really not worth the effort.

If you want professional help in transforming the spreadsheet number-crunching called budget into a TOP TOOL that supports your business get in touch with TopCFO, we have extensive experience in complex and high-value budgeting processes. TopCFO can support any business in transforming their spreadsheets into a TOP business TOOL.

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