The budgeting process is often considered a long and tedious one that requires gathering, consolidation, and analysis of data from multiple sources. There is much more to the budgeting process than simple data consolidation, you have to answer several questions, piece together missing information, and consult multiple teams to arrive at the perfect budget. If you are going to do all this manually, then you are signing up for a cumbersome task.
Automating repetitive budgeting process steps is an effective way of streamlining the budgeting process. We have explored various steps in the process of budgeting and ways to automate the budgeting process in this blog.
Overview of The Budgeting Process
Budgets play an important role in the financial planning and forecasting of a business.
What is The Budgeting Process?
Simply put, budgeting is the tactical implementation of a business plan. A detailed and descriptive road map of the business plan that sets various measures and indicators of performance is required for every business. The process of budgeting helps chalk out a detailed road map for the business.
- Once a budget is prepared, the process teams get a clear picture of goals and objectives and the performance indicators to measure the progress.
- Finance teams review past budgets and plan expenses for forecasting revenue during the budgeting in process.
- The process of budgeting must align with the upper management while analyzing the budget data and establishing future goals for better control of spending.
The process of drafting a budget focuses on allocating resources (mainly financial) to certain company projects and objectives.
Budgets are formulated to enforce budgeting policies and prevent overspending within the organization.
Reviewing past budgets is an effective way to gain a more accurate picture for creating current budgets. Finance teams get a better understanding of what worked and what didn’t by reviewing past budgets. The budgeting process encompasses all the steps taken by organizations to prepare and execute budgets for a specific period.
Senior executives and managers are often involved in the budgeting process for assigning specific amounts to spend on different expenses. The budget is the final step in the execution of the business plan. Any deviation or inaccuracy in the budgeting process results in cash flow issues for the organization.
The main areas of focus while preparing the budget are:
1. Objectives – These are basically business goals that are developed at a high-level strategy at the beginning of the business. For example, increasing the amount spent by each customer at your retail store is a business objective.
2. Strategies – These are ways in which you plan to achieve objectives. Organizations may develop one or more strategies to achieve business goals. Customer spending can be increased by expanding product offerings or promotions or sourcing new suppliers.
3. Reviews – Once strategies are framed and implemented, the next step is to evaluate the effectiveness of these strategies. For effective evaluation, you need to set specific evaluation criteria or performance indicators. Performance indicators like average weekly spending per customer or average price changes can be considered while evaluating the effectiveness of strategies.
4. Targets – Setting quantifiable and time-based targets for specific budgeting periods is important in the budgeting process. The process or project team must aim at reaching/achieving these targets by the end of the budgeting period. Increasing the volume of sales in certain products by a certain time can be considered a target.
Budgeting Process Goals
Now that we have understood what the budgeting process is, let us go onto the goals of budgeting. The main objective of budgeting is to help in financial planning. There are other goals of the budgeting process, as mentioned below-
Plan actual operations – The process managers can use the budgeting process to consider how process conditions change and the steps to be taken to improve process efficiencies. A well-planned budget allows managers to understand how to address issues as they arise.
Coordinate organizational activities – The budgeting process encourages managers to build relationships with other parts of business operations, and understand interdepartmental interactions. Well-coordinated departmental activities support the overall growth of the organization.
Communicate plans to managers – Budgets are tools to communicate project plans to the entire team so that everyone gets a clear understanding of the role they play in the organization. Budgets also encourage communication of individual goals, plans, and initiatives, all of which roll up together to support the growth of the business. Clear communication also ensures that appropriate individuals are made accountable for implementing the budget.
Motivate managers to achieve budget goals – The budgeting process enables managers to focus on participation in the process. A budget provides a challenge or target for individuals and managers by linking their compensation and performance relative to the budget. Managers can use budgets to evaluate their performance relative to the targets they have set.
Facilitate funding – Budgets set targets for costs and revenues, which guides teams to tailor their work to achieve these goals. Budgets are vital for businesses that receive funding from capital firms because they would want to know how their investment is spent. Budgets also help investors see what you have made and how you have followed budgets in the past.
Avoid difficult conversations – Individuals have exciting ideas and campaigns they want to implement. While this should be encouraged, budgets act like checkpoints that keep expectations in check by giving firm numbers.
Types of Budgets
Budgets help companies keep track of timing and amounts of income and expenditures. It also allows them to set realistic goals, track deviations in planning, and enforce corrective action as and when required. A robust budget framework is built around a master budget consisting of operating budgets, capital expenditure budgets, and cash budgets.
Knowing the type of budget is important to understand the budgeting process that should be followed by your business.
1. Operating Budget
The operating budget includes revenues and associated expenses in the daily operations of the business. This budget includes employee salaries and benefits, and non-salary expenses.
2. Capital Budget
Any major purchase made by the business is covered by the capital budget. Typically, requests for large assets like property, equipment, or IT systems create a significant impact on the organization’s cash flow. The purposes of capital budgeting are to allocate funds, mitigate risks in decision-making, and set financial priorities.
3. Cash Budget
Cash budgets tie the operating and capital budgets and account for the timing of payments and timing receipt of cash from revenues. Management helps management track and manage the company’s cash flow effectively by assessing whether additional capital is needed for raising money, or if there is excess capital.
Businesses can use the right type of budget based on the type of operations within the department.
Phases in the Budgeting Process
The entire budgeting process involves 4 phases – preparation, approval, execution, and evaluation. Let us look into each of these phases in detail –
Preparing the budget is the first and most crucial phase in the budgeting process. Reviewing existing financial information is the first preparatory step in budget preparation. The past budgets must be reviewed on the basis of – was the spending as per the past budget; were the forecasted growth targets were met; whether were there any difficulties in executing the budget, and if so, how were they tackled; and were there any unexpected barriers and how were they tackled.
Collaborating with various department heads is a good way to gather information on the above points. Once input is received, you can begin calculating the revenue expected from the business. Identify all the revenue streams and calculate the gross profit. Reviewing cash flow, setting fixed costs, accounting for variable expenses, and forecasting any additional one-off expenses, are all part of the budget preparation phase.
Once the budget parameters have been set, it is time to get through the approval process. To get speedy approval on the budget, it is important to address all the concerns or queries that the stakeholders may have during the preparatory phase itself. Automating the budgeting workflow approval is a great way to speed up the whole budgeting process. Workflow automation provides a convenient and trackable way for all stakeholders to review and approve the budget. Automated approvals ensure the right sign-off at every stage of the approval process, and a contingency plan via alternative workflows when the approver is not available. Digital copies of approval sign-offs let you create a clear data trail for audits.
Once the budget is approved, the funds allotted to various departments can be distributed. The chief financial officer (CFO) or the company controller is tasked with the responsibility of disbursing the funds. Here again, automated workflows can be used to ensure that funds are distributed to the correct business area. Following this method not only helps cut down on waste but also helps process owners track unspent funds effectively and issue warnings in case of overspending.
Periodic evaluation of the expenses is a must in the budgeting process. Process owners need to be on top of the expenses and compare it with the allowed amount as per the budget. Automating budgeting process steps with appropriate workflows makes it easy to track and report expenses. By integrating the workflow platform with an ERP system, additional data can be extracted as well. The finance department also benefits from a central repository that makes report generation super easy by using automated workflows.
Best Practices in the Budgeting Process
The budgeting process usually begins 4-6 months prior to the financial year, some businesses however, take the entire fiscal year to complete the process. Most companies set budgets and undertake variance analysis on a monthly basis. There are several steps in the budgeting process before the final budget is implemented.
Common steps include
- Communicating within executive management
- Establishing targets and objectives
- Developing a detailed budget, compilation, and revision of the budget model
- Reviewing and approval by the budget committee
Let us go through the steps in the budgeting process.
1. Review of the previous budget
A review of the existing information in hand is a good way to start the budgeting process. The best evidence for how your new budget should play out is the previous budget.
The previous budget should be evaluated on the following points –
- Was the spend more or less than the anticipated amount?
- Were your assumptions about the industry and your business growth accurate?
- Were there any unexpected events or shortfalls, and what caused them?
- Was it easy to enforce the budget? Did team members follow it?
This review must be carried out at a high level throughout the organization, and encourage individual budget managers to review budgets within their organization. At this stage, it is crucial to consult other team leaders as well. Best budgets are collaborative and you need to know how well the previous budget worked for stakeholders.
2. Calculate existing revenue
The starting point for any budgeting exercise is to figure out how much will spend amount to. At the organizational level, you need to identify the income streams. How much is the gross income? To determine this, you need to list your core products, their pricing, and the expected turnover volumes for each product in the coming year.
This is an approximate value, hence, will not give a precise figure. In the case of start-up businesses, the investor capital or venture debt is spent. In this case, the burn rate that you are comfortable with needs to be identified. The amount of total investment that you are able to commit for each period of time should be determined while calculating existing revenue.
3. Set fixed costs
Fixed costs also referred to as overhead costs, are those over which you have little or no control. These costs are not affected by your sales volumes. The success or failure of the business does not affect the fixed costs that you will need to shell out anyway.
Fixed costs include –
- Rent or mortgage payments for workspaces
- Website hosting and servers
- Insurance policy premiums
- Employee salaries
- Loan interests or instalments
- Utility payments such as electricity and internet
Planning for fixed costs becomes easy when you know the employee headcount for the year, and sort out the office space and insurance policies.
4. Calculate variable costs
As the name suggests, these costs vary according to business operations. These are discretionary costs that are more fluid and can be tinkered with. Variable costs come up on a need basis.
Some examples of variable costs are –
- Marketing and advertising campaigns
- Corporate investments and donations
- Travel and client meetings
- Software subscriptions
- Team perks
- Office decor and renovations
Discretionary costs do not necessarily mean that these costs are frivolous or unnecessary. For example, marketing costs are required for business growth, and team perks can be key contributors to employee engagement, both are necessary variable costs. Variable costs need to be justified more critically while building a business budget. Whenever there is an overshoot in a budget, variable costs are the first to be cut.
5. Forecast additional spending
Some business expenses are beyond the horizon. A series of acquisitions or mergers, special business events that occur rarely, or consulting for audit preparation, are examples of additional spending. The best way is to set aside a separate section for these expenses in the budget. Although you need to account for them in your spending, they need not be a part of the budget core. It is wise to include a contingency fund in the budget to handle uncertainties in the business.
6. Scrutinize cash flow
Analyzing cash flow is the starting point for budget analysis. A clear record of expected revenue and expenses can be derived once the previous budget is analyzed and various costs have been identified. Scrutiny of cash flow is carried out based on points like – was your spending as expected; was revenue consistent across the last year or were there spot seasonal effects? Cash flow is the relationship between incoming and outgoing cash.
The cash flow helps you know that the spending is as per the budget plan, and a dip in the income can be matched with the expenses. While scrutinizing the cash flow, you need to look for specific areas that might require special attention and those aspects that impact the budget heavily.
7. Make business decisions
Based on the analysis and preparation you have made so far, you need to chalk out the budget plan. There are several templates available for creating a budget. The most challenging business decision to make is to choose the projects or business priorities that require funding. Adopting a consultative mode throughout the process helps gather input and rely on the expertise of skilled team members to guide through the process.
8. Maintain clear communication
The last step in the budgeting process is sharing it with team members and clarifying what is expected from them. It is highly likely that several team leads will have to handle the costs of their teams themselves. To do that effectively, they need the right tools and clarity on expectations.
All stakeholders need to know how much they are allowed to spend and what they have to spend. Team leads also need to know the correct way of reporting their spending. Communicating clear expectations from each stakeholder is an important step in the budgeting process.
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Need for the Budgeting Process
The process of budgeting is much more than just numbers. Creating, implementing, and evaluating the budget is an important aspect of the financial health of the organization. Apart from tracking and estimating income and expenses for a business, the budgeting process is important for several reasons.
What is the need for the budgeting process?
- Helps set and highlight financial priorities and goals
- Evaluate the performance of the department – at the managerial level and below
- Communicate objectives and plans clearly to departmental managers
- Validate expenses of every department
- Control spending of every department
- Identify available funding and the need for additional funding
- Align resource allocation to the business goals and objectives
- Facilitate collaboration between departments
Setting clear expectations is the main purpose of the budgeting process. Teams can work with a clear purpose with a well-planned budget. The process of budgeting cannot be perfected overnight, it requires collaboration among upper management, the finance department, and various budget and project managers across the company.
A budget can be developed via a top-down approach, where upper management begins the process by evaluating business objectives and current resources for preparing a budget plan. The responsibility is then passed down to the department managers who can set guidelines based on the overall budget allocation.
Alternatively, a bottom-up approach can be followed, where planning begins at the departmental level and goes up. Each department prepares its own budget plans and cost estimations and passes them to the upper management combining them into one big inclusive budget process.
Improving the Budgeting Process with Automation
Workflow automation is a great way to improve the speed and efficiency of the budgeting process. A workflow automation solution like Cflow helps companies maintain cash flow and enable growth via automated workflows for various steps in the process of budgeting. Cflow is a workflow automation solution that simplifies workflow management. The visual drag-and-drop form builder enables no-code workflow automation for key business processes. The software issues alerts and notifications to stakeholders to ensure that budgets are reviewed and approved on time.
The need for budgeting and the best practices have been thoroughly explained in the above sections. Businesses looking to speed up budget approvals and streamline the budgeting process are turning to workflow automation solutions. As per Allied Research, the global accounting and budgeting software market which was valued at $16.85 billion in 2021 is poised to grow at a CAGR of 11.4% to reach $47.97 billion by 2031.
A sharp increase in technological advancements in the area of accounting and budgeting software is expected to create lucrative opportunities in the market in the forecast period. Leverage technological advancements and make your budgeting process more effective and speedy by signing up for Cflow.
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