THE BUSINESS BUDGETING PROCESS – benefits, steps, applications

Whatever we say about corporate finance cannot pass without one basic process, which is practically related to absolutely all aspects of corporate finance, namely the budgeting process.

Often the process of budgeting of the business is underestimated due to lack of information, knowledge, and experience. However, without it, we cannot set a goal, a clear direction of where we are going, how we are performing - are we going in the right direction, how much we have deviated, is this deviation good or bad; how many and what corrective measures should be taken into account, and our pricing - does it correspond to the presentation of the business, our financial parameters, etc. As the business grows and becomes larger, this process begins to emerge as key and important in tracking and navigating the stages of development of every business. Of course, the smaller the business - significantly simpler are the steps. Sometimes it is done intuitively, but often important moments are missed. It is good to introduce it as early as possible in the existence and management of the business. This way, You will have both a history, a view of things, and reference points on where to go.

When we talk about budgeting, we are talking about a comprehensive process. We plan both financial and non-financial indicators. Ultimately, before we have a financial result, it is preceded by some actions, and the more parameters we have for measuring it, directly related and recognized by the business, the easier it will be to understand and explain the financial numbers of the business. For example, in addition to currency, the company’s revenues can also be measured quantitatively - it depends on the business and there are various options, including when the business is of mixed goods or services, which are difficult to measure with the same unit of measurement. Then other options for quantitative measurement are sought, which can be applied. When we measure volume, we also measure the mix. Of course, in the context of revenues, margins, deviations by product groups / service groups, by customers, etc. are also important.

And so let’s move on to the topic with quick steps - how to plan our budget:

• Determine the revenues and expenses of the company: Start by determining the revenues and expenses of the company for the previous period. That is, we start from a historical basis, which is highly recommended to be at least 12 months / i.e. 1 calendar year /. This will help You understand what the main sources of revenue are and what the main expenses of the company are. When You do this analysis, it is good to make a more detailed breakdown in natural numbers, both by assortment and by groups, customers, and others. Here it will already depend on the type of business.
• Make a budget for the current period: After You have determined the revenues and expenses of the company, you can start making a budget for the current period. Include all expected revenues and expenses for the period. It is also recommended to follow the same principles that you used during the analysis. Mandatory at least a 12-month period. A small deviation - if the budget You are preparing is operational - the period is mandatory for 12 months; if You pursue strategic goals and want to see a little ahead in time - then you prepare a budget for 3 or 5 years. There is, of course, a difference in the approaches used. When You make the budget, You always start with the quantitative measures and the business mix. Only at the end are these measures valued in money. That is, when You plan revenues, You never say - this year I will sell for 100 thousand levs. First, You start with what you will sell /in detail/, what volume of everything you will sell, how sales will be calendared by month, will there be and what customer groups I expect to realize, will there be a difference in sales approaches and how it will affect the process, different pricing policies, etc. Planning expenses - with a similar approach. If there is production - there is a mandatory depth. When will it be produced, will stocks be kept, how much, where. Which of the expenses are related to the volume, how many of them are permanent, planning of purchase prices, labor costs /do not forget to index upcoming increases/, change in personnel /especially if you plan a change in volumes/, capital expenditures, etc. Even if You are in the trade and services sector - this method of planning is mandatory, taking into account your process.
• Monitor its implementation of the budget: This will help You understand if You have achieved Your goals and if You need to make corrections to the budget. Monitor it at shorter intervals. If the business is on a large scale, it is mandatory to track it monthly, including deviations by month, not just on an annual basis. If the business is smaller and there are no serious deviations, it can be done quarterly. When You track it, this can be done through key indicators, not through the entire process. Often, it is not necessary to wait for the accountant to finish to see where You are. Of course, do not wait until the end of the year to see your financial results. Then it will be too late.
• Change the budget if necessary: If You find that something is not working properly in the budget, you can change it. For example, if You find that there are not enough revenues, You can change your marketing strategy or reduce expenses. It is permissible and sometimes highly recommended to maintain current forecasts in addition to an annual budget, which change in accordance with the news in the business that have occurred since the annual planning. For more serious changes, it is recommended to review the entire process anew, as well as the strategies associated with it.
• When planning a budget - always take into account the current strategies of the business. There is no logic and it will not lead to a result if You use certain approaches in managing the business and do not take them into account when planning.
• Seek help from a professional consultant: If You have difficulties in planning Your company’s budget, You can seek help from a professional consultant who has experience and understands the processes of managing corporate finances as a whole. I would like to point out that this is not Your accountant / although if he has experience in these processes, it will be of great benefit /. For more information about the possibilities seek us here. 

Starting and maintaining the process of budget planning may seem complicated, but it is important to keep a clear idea of the financial state of Your company and follow the basics of what is happening to take timely action when needed.

Why is it important to plan a company’s budget?

Planning the company’s budget is important because:

• It allows You to control expenses and determine the company’s revenues. This can help you achieve financial stability and achieve your financial goals.
• It can help You avoid unnecessary expenses and optimize the expenses and processes of the company.
• It can help You choose the right investments for the company, taking into account its financial goals and risk profile.
• It can help You determine if you need to make corrections to your financial management strategy.

Why it is important to monitor the execution of the budget?

Monitoring the execution of the budget is important because:

• It allows You to monitor the financial state of your company and assess whether You have achieved your goals. 
• It provides an opportunity to identify problems and solve them before they become bigger. This may include unspent money, improper spending of money, or a lack of money to cover the company’s obligations. Failure to realize key customers or sales in the required mix or quantity. 
• In case of over-realization and achieving good results - to update the actions accordingly, so that the business can keep them and even increase them. 
• It can help You make timely corrections to your budget and strategies if necessary. For example, if you find that there are not enough revenues, You can change your marketing strategy or reduce expenses /the latter with particular attention, as it does not always work/. 
• Monitoring the budget can also help You determine what works and what doesn’t work in your business and accordingly correct it.

And last but not least, let’s go back to the beginning of the article - the budgeting process is directly related to the cash management strategy - that is, we will already have clarity on what is happening and how to approach it. Whether to turn to a creditor, investor, make additional capital investments, or simply invest for additional income.

The budgeting process is closely related to pricing. Based on these parameters, the cost of products and services is formed, in line with the entire business process - by assortment, by groups, by customers, by types of internal processes, and the natural continuation of the pricing policy.

In general, there are many common principles that apply absolutely to every type of business. The difference comes in the details, as well as the adaptation of the process to the needs of the respective business.

Author: Galina Vankova, Ethical Finance GV LTD

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