The Modern Budgeting Process

The budgeting process can be challenging, even for experienced teams. There are many people involved, questions to answer, and points of confusion to resolve. For this reason, teams frequently put off budgets for months, or never complete them at all. 

In other cases, though, the opposite is true - some companies micromanage their budgets to the point of seeming prescriptive. They rely on a dizzying stack of spreadsheets to account for every expense, no matter how tiny or insignificant. Like the company with no budget, a company that over-manages its finances is bound to run into trouble. 

Whichever is the case for your organization, this article will help you by providing the basics of business budgeting processes. This will provide you with the fundamentals to ensure that you are adhering to the right practices. 

You’ll also discover established “best practices and principles” to model in your own organization. 

All companies must have a budget. There is a big difference, though, between an effective budget and one that only wastes employees’ time. 

What is the budgeting process?

The budgeting process gives companies the ability to plan financial budgets for a specific period of time - usually a month, quarter (three months or 13 weeks), or a year. 

The process entails reviewing budgets from past periods, forecasting revenue and expenses for the upcoming period, and allotting amounts to team budgets to facilitate continued operations and growth. 

An effective budgeting process involves direction from senior management, finance department staff and management, and departmental budget managers throughout the company. 

A budget is a business plan put into action - it provides a means to achieve company goals and focus on company priorities by allocating the financial resources for employees and teams to do their best work. 

Why is business budgeting important? 

The surface benefits of budgeting are well-understood. If a business doesn’t have money, it can’t stay in business. This emphasizes the need for a clear cash flow plan that all teams and employees can follow. 

Going a bit deeper, through, there are several other important reasons why business budgeting is essential for any organization that expects to grow in the post-pandemic world: 

  • It brings clarity to goals and expectations - when your teams can clearly see your cost and revenue targets, they can tailor their activities to optimize their use of budgetary funds. 
  • It is necessary for funding - if you seek a loan from a bank, venture capitalist, or other lender, they’ll want to know how you’re currently spending your money. Lenders are also more likely to approve loans when they can verify that you have been able to adhere to a budget in the past; 
  • It puts your priorities in black and white - While your teams may be responsible for many of their own timeframes and deadlines, a solid budget provides overarching guidelines for self-direction. 
  • It eliminates devaluing anyone’s ideas - excited team members will often propose new ideas, which might not always be timely, feasible, or appropriate. By establishing a budget, you can provide objective evidence to support tabling an employee’s idea for another time. 
  • It provides a connection point between finance and operations - budgeting is an integrative, collaborative process that requires the insights of many employees and team leaders. By learning about departmental priorities, finance professionals can offer tailored guidance to empower employees.

What are the key budgeting process steps? 

Although every budgeting process for a company will look a little different, there are several key steps that should be included no matter your company’s size, industry, or regulatory status: 

  1. Always review the previous period’s finances. The best place to start your new budget is by looking at your past budget. Were your spending projections accurate? What about growth projections? Did you encounter unexpected obstacles? Did team members follow your budget closely (or at all)? 

    It’s critical to perform this task from an overall company standpoint; however, it’s equally important to have individual team managers review their team budgets as well.

    If you are able to bring team leaders from different departments together to review the budget, you can create more synergy and a better understanding of your spending and income needs. 
  1. Determine existing revenue. Before you can create a budget, you’ll need to know how much you have to spend. Look at all available income streams and determine your gross income. 

    Also, list your company’s core products and pricing, and how many units of each you expect to sell for the upcoming period. These numbers don’t need to be exact - they’re simply meant to provide boundaries within which you can create an effective budget. 
  1. Determine your fixed costs. This is one of the steps of budgeting process meetings that many companies skip - because they’re not impacted by sales volume, people typically assume these costs remain constant. 

    Still, it’s important not to forget these costs when establishing a budget. The amounts paid for property leases, payroll, insurance, product materials, loan interest, utilities, shipping, licenses, and other fixed costs can have a dramatic effect on your budget. 

    Some finance teams don’t include payroll as a “fixed cost,” especially if they have plans for rapid growth over the next reporting period. This amount could fluctuate if more employees are needed, or if employees work overtime to handle additional work. 
  1. Account for variable costs. Although not directly tied to sales volume, variable costs are also an important part of your company’s budget plan. These expenses can include marketing and advertising, business travel, team incentives, software subscriptions, and workspace renovations and upgrades.

    These aren’t “unnecessary” costs - in most cases the growth of the company depends on activities that require these expenses. Still, they must be reviewed more carefully than fixed expenses to ensure that they don’t get out of control. 
  1. Forecast extra expenses. It’s impossible to tell what might happen in the future, but the better you can predict one-off and irregular expenses, the more solid your budget will be. These extra expenses can be for consultations to help prepare for audits and opportunity meetings, team building events, new department launches, and many other scenarios outside of your day-to-day operations. 

    Funds for extra expenses should be separated from the rest of your budget. It’s also a good idea to dedicate a portion of your budget to increasing your “unforeseen expense fund” - this can help your company handle extra expenses without the burden of freeing up capital.
  1. Examine your cash flow. Now that you have your projected income and expenses, as well as historical data from past budgets, you can begin conducting the analysis to create an effective budget for your next reporting period. 

    Look for income and spending patterns that appear in multiple areas of your budget. Was there an anomaly in the market, or are there areas of your company’s income or spending that need additional attention.
  1. Create your budget. With a clear understanding of your financial position, you can begin evaluating opportunities. Which projects could benefit your company the most? Which ones can wait.

    Be sure to invite input from team members throughout your organization - through a collaborative approach, you can create a budget that every team member can support and follow. 

    Also, keep in mind that your budget may require a few adjustments along the way., The idea isn’t to set your financial expectations in stone, but to provide benchmarks to guide the decisions, focus, and actions of employees, teams, and the organization as a whole. 
  1. Communicate your budget clearly. Spending weeks on your budget, and bringing in dozens of team leaders and employees in the process, isn’t going to help if your budget isn’t clearly and consistently communicated.

    As soon as your budget is finalized and approved, be sure to share it with your teams. This will give department managers and team leads the tools, guidance, and framework to effectively manage their own costs within the budget you and your team have established.

    Make sure that every employee and team is aware of individual and collective spending limits, and how they should report expenses as they buy products and services to facilitate their work.

A spend management platform like ControlHub can take the headaches and guesswork out of reporting. In fact, when coupled with employee debit cards (physical or virtual), transactions are recorded on the platform in real time, giving company owners and finance teams the ability to access spend data and make budgetary adjustments with a few mouse clicks. 

ControlHub simplifies budgeting by automating your entire purchasing and reconciliation process - no more spending hours trying to track down an unauthorized purchase, or begging employees for expense receipts they lost weeks ago. 

By setting individual spending limits, you can keep expenses predictable, while still giving employees the autonomy and flexibility to buy what they need. Even better, you can grant employees individualized “no approval needed” thresholds, which takes the hassle and wait out of requesting small purchases. 

To find out more about how automation can help take the work out of budgeting and reporting, contact ControlHub today.