Developing and Managing a Budget

Many individuals view budgeting as a way of eliminating the fun from spending because it limits them on what to buy. However, if you are in a managerial position, you cannot view budgeting this way. Developing and managing a budget is how successful companies allocate, plan, and track fiscal expenditures. A well laid-out budgeting process is the basis of proper business management, development, and growth. Whether you have appointed to the managerial position lately or you want to implement a budgeting strategy, the process should be governed by the organization’s vision. Firms that focus on their strategy know where to allocate their resources and prevent them from spending money in areas that won’t develop their goals.

How Does A Budget Contribute To Good Management?

Budgeting is a vital ingredient for the success of any organization. It eases the decision-making process. The department of budget and management can implement the plan. However, smaller firms can assign this role to the departmental heads. Here is how budgeting helps managers.

• Assess Available Funds

The first benefit of having a budget is that it gives the management team a clear perspective. Before doing anything, the leaders should first understand where the organization stands financially. That gives an idea of how to run daily operations and kick out unnecessary expenditures.

• Eases Day-To-Day Operations

The basis of a successful organization lies in its regular expenses. If you want to expand to another city or launch a new product, you should first evaluate whether you can manage daily expenditures. Budgeting will assist you in categorizing funds to ensure there is enough for everything, especially during the tough times.

• Promotes New Projects

An essential role of budgeting is to develop both short and long-term plans. Every organization wants to grow; none wants to remain dormant. When you evaluate your current situation, you will use your strengths to expand. It also helps you to determine what is possible and to uncover unnecessary expenses.

• Determine Suitable Funding Sources

Cash flow is a serious issue in many organizations, to the extent of causing business failure. The office of management and budget will evaluate business operations and determine the best funding sources for every project. You will know when to take loans and how to invest the money.

Step-By-Step Guide to Developing a Budget

1. Create A Strategic Plan

Every business should have a purpose for its existence. Organizations must determine what they want to accomplish. It should present it through a written mission and vision statement. A strategic plan is a guide on how a firm plans on achieving its goals. That way, you can channel the capital projects towards supporting the development of the mission.

2. Define Goals

Set precise objectives that should be specified and communicated to all stakeholders. The goals should cover all aspects of the company as they help people to understand the budgeting process. Survey the situation before determining whether the budget you are creating is to spike growth or maintain the present status.

3. Project Revenues

You should forecast your income streams depending on historical financial performance and the expected growth prospects. The growth can be tied to organization goals and the initiatives that management is planning to spike business growth. For instance, if there is a plan to increase sales by ten percent, interest from the projections should feature in the revenue forecast.

4. Determine Future Fixed Costs

When projecting future expenses, you should consider the monthly expenditures that don’t change. They include insurance, mortgage, facility expenses, rent payments, and utility costs. Fixed costs rarely vary, and the budget should fund them. Remember to factor in projected fixed costs. For instance, if you plan on employing new staff members, the salaries should be included in your current budget.

5. Consider Variable Costs

The department of budget and management should also project future variable expenses. Although they fluctuate from one month to another, they follow a pattern you can use to predict. Such costs can be controlled.

6. Factor In Future Projects

Set aside much money for goal-related projects when creating the budget. Every initiative should be accompanied by projected costs linked to the goals. Identify and incorporate associated costs into the annual budget. Don’t forget to consider projected expenses too. For instance, if the sales department is planning on boosting sales, factor in expenditures that will help achieve this goal like marketing materials, entertainment, and travel.

7. Target Profit Margin

Whether your organization is a full-profit or non-profit, you should have a targeted profit percentage. Profits are used to reward investors and business owners. Non-profit companies use their benefits to develop the organization. Profits are vital for all companies, and a reasonable margin speaks highly of the strength of a venture.

8. Consider Limiting Factors

There will always be some determinants that restrain growth, hinder production, and limit sales volume. It can be anything, from decreased demand, lack of resources, and inadequate labor supply. Since they impact planning and budgeting, you should analyze these factors upfront.

9. Use A Suitable Budgeting Method

Organizations are different, and so are budgets. The office of management and budget should analyze the business model and needs before settling on a budgeting method. As the company develops, the market changes, and there are many alternatives to traditional budgeting. Here are a few:

• Zero-based budgeting

Every cost must be explained based on its importance to the company and its relevance to the mission.

• Activity-based budgeting

You identify essential cost drivers and determine the focus to which you allocate the funds.

• Incremental budgeting

It is a traditional approach that involves making minor changes to the previous overall budget.

• Rolling budgeting

It involves the addition of a budget for the new period from where the old one expired at different intervals.

10. Settle For The Right Budgeting System

There are four primary ways of creating, tracking, and monitoring a budget. Each system utilizes varying techniques, but they focus on the level of your business.

• The pen and notebook

It is an old method of creating budgets, and also the least pricey. When using this method, you write down all your income sources and your expenditures too. Once the two balance out, you are ready to go. The method may be appropriate for small businesses, but not large ones since a lot of paperwork are required.

• The spreadsheet

One of the popular spreadsheet software that people use for budgeting is Microsoft Excel. Some sites provide free samples of budgeting that users can download and fill in details. It makes the task straightforward since you don’t have to fill in too many details. The method is excellent for mid-level businesses that don’t have too much data to enter.

• Online software

You can make use of one of the many free web-based software programs that help with budgeting. The software programs allow consumers to create and organize your expenditure into categories and manage your spending. Therefore, you know the groups that take up most of your organization’s money. You can use the statistics to plan future budgets. It is ideal for large organizations.

11. Get Board Approval

The head of an organization, its owner, or the governing board should accept the budget and check on its progress often. Just like personal finances, the owner should take the time to review the financial statement for these purposes: • To understand all expenditures • To know how the budget is performing • To prevent misappropriation of funds or fraud by the employees

12. Set-Up A Budget Review Committee

A crucial aspect of budget management is regular reviews. A budget committee review should commence every month to monitor its progress. The committee helps to understand the variances in the plan and handle any arising issues. You should consider meeting once a month so that you can modify the budget or correct any overspending before it goes overboard.

13. Solve Budget Variances

The responsible departmental manager should review any changes to the budget and handle any related questions. At times unprecedented situations come up, some of which are unavoidable. Therefore, you should have an emergency budget to deal with such matters. For instance, the HVAC in the office might break down in the middle of winter, and you have to fund its repair. Proper budgeting helps to develop an organization, but a sloppy one might blindside the company and impact its long-term financial benefits. Remember to factor in your customers before settling for a budget because they are the primary reason behind your organizations’ operations.

FAQ

How do you monitor a budget?

When we are carrying out and completing the project budget, it is necessary to constantly review it. Budget monitoring is essential to detect where the company is financially positioned and what it does to not lose sight of its objectives. Consequently, by monitoring it you must have a review trail, recognize and analyze the monthly income, and identify if you are keeping correct business accounting. There are many requirements such as having a reliable and orderly accounting system, a budget manager, and adapting the structure of your organization. Then, develop tasks is imperative as analyzing the sales process, the income, how much clients owe, and of course, the expense

What goes in a cash budget?

Principally, within the cash budget, we can find the forecast of a company around all the cash movement, the inflows, and outflows. There is an important responsibility to control, plan, and to organize every resource of the company, all of this implies administration and accounting work. In addition, there are many companies’ budgets that are related to the cash budget, such as the balanced budget, the operating budget, and the master budget. Similarly, the cash budget is effective because like the others it analyzes the needs thanks to the account of the outgoings of the same cash. A company’s cash flow has to be effective, so consider how important it is to the budget by progressing with a budgeting software, and also respect the time, the position, the estimated cash sales, and the actual cost.

What is a sale budget?

This is the budget that carries all the information and the follow-up of the sales, it is based on the sales already made in order to analyze them and to let the business owner know how the future sales will be. The sales budget is particularly interesting, through the budget process you can clarify the objectives by the previous results. The information provided is absolutely imperative, as more major sales will increase the income, and it will be related to the income budget. Furthermore, we should not forget the fact that it is thanks to the increase in sales profits, the yield of a product or the service generated in a company will be better.

What are examples of monthly expenses?

There are many examples of monthly expenses that are very common, there will always be those that are a necessity, and then the expenses that are not so necessary. No matter if we are talking about a family or business budget, there will always remain some fixed cost, necessary expenditure, and then some variable cost, or an unexpected expense. It is fundamental to be aware that each expense has a purpose that it does well. Back to the topic, some examples of necessary expenses are rent, transportation, food, bills and utilities, life, home, and health insurance. Then, there are the not-so-necessary expenses such as clothing, leisure activities. Businesswise this can be equally divided, the important monthly expenses would be the rent, mortgage, and basic supplies, and those that are variable expenses would be advertising and external communication. Always keep in mind that you must organize your budget planning, and have an emergency fund for any unforeseen event that affects your financial resources.

What are the 3 types of budgets?

Managing budgets is essential for any budget owner or senior manager. Therefore we must know there are many types of budgets, some more important than others. However, there are different areas of budgeting such as family, government, and business budgets. Nevertheless, if we refer to the most important types of budgets we will find quite a few. Mainly at a personal or family level, the budget for needs, and the budget for luxuries or leisure activities. Then there are three types of the government budget, the balanced budget, the surplus budget, and the deficit budget. Finally, the three types of financial budget or a company’s budget, which would be the operational budget, the capital budget, and the cash flow budget.

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