FINANCIAL BUDGETS – SHOULD I PREPARE ONE?

The simple answer is yes. But what is your purpose for preparing one? How will it be used? And what can it do for your organization?

A budget is more than an excel template that needs to be completed as part of the monthly, accounting closing process. A budget should be a tool that is used to help the organization focus on their commitments and to achieve specific and well-defined goals. I have seen budgets used for two primary purposes or a combination of both: (1) planning and forecasting and (2) control and oversight.

Budgets for Planning Purposes:

Many start-up or smaller organizations will prepare a budget with a focus on achieving various levels of sales or profitability. These types of budgets are built with a “top-down” approach.  Many of these budgets start with a sales forecast and various expense line items will be driven from that sales figure (e.g. cost of goods sold or sales commissions). A forecast is not a budget or vice versa. A forecast is a prediction of future events. While a budget is a commitment to achieve defined goals.

Budgets for Control or Oversight:

Other organizations will prepare a budget to monitor various metrics and expenses.  Larger or more-established companies will use these types of budgets.  Control-oriented budgets are built up from the various departments or at the operating levels of the organization (sales, production, administrative, etc.).  The various pieces of the budget are put together in order to achieve a complete model.   These types of budgets are typically more complex and take more time and involvement to complete and maintain.

Whether you are preparing a budget for either purpose, it is important to keep the following items in mind for a successful process:

1. Goals or line items within the budget must be measurable and achievable.  If the budget is not deemed to be achievable, the budget will lose its effectiveness.

2. Budgets (especially budgets used for control and oversight) should be developed with involvement from the operational managers so they are vested in the process.

3. Events or conditions change throughout the year so your budget should change as well.  Budgets should be reviewed quarterly to determine if changes are necessary.

When properly implemented, the budget allows management to understand what is happening at all levels within the organization. The budgeting process can be the financial tool that translates management’s objectives and strategic plan into numbers.

WRITTEN BY JOHN NICKLAS