A business budget typically progresses in phases that in total produce a complete budget life cycle. Regardless of its focus, the budget cycle begins with planning and ends with a thorough evaluation. Although the terms used to identify the four phases within the cycle may differ between businesses, the objectives of the preparation, approval, execution and auditing phases are generally the same.
Budget preparation is a time-consuming process that typically takes from three to six months to complete. During this phase, department managers -- or the owner -- make plans, prioritize spending, crunch numbers and develop a preliminary budget plan. Because most businesses prepare separate budgets for each department or division and then combine these later, steps in the budget preparation phase may repeat themselves before creating a preliminary budget able to pass through the approval phase.
The length of the approval phase generally depends on the size of a business and its organizational structure. For example, budget approval responsibilities in a small business with a flat organizational structure typically involve only the owner, or the owner and a few key managers. In contrast, mid-size and large businesses characterized by a formal, hierarchical organizational structure typically assign approval responsibilities to boards, committees or authorized senior-level managers. Budget approvals often require much discussion and a consensus vote before the approval phase is complete.
The Execution Phase
The execution or implementation phase of the budget life cycle most often runs from the beginning to the end of the fiscal or calendar year. Regular, consistent monitoring to make sure departments are following budgetary constraints and to maintain internal control is vital during this phase. If adjustments become necessary during the year, parts of an annual budget may return to the preparation phase and go through the cycle again. If monitoring uncovers discrepancies such as significant cost overruns or spending that doesn’t match budget allocations, an internal audit may take place before the year’s end.
The audit phase -- which consists of internal auditing, external auditing or both -- typically take place after the fiscal year ends. Thoroughly examining year-end financial reports and statements provides ways to assess compliance with budgetary constraints and determine whether projections used to create the budget were accurate. An evaluation report created by the audit team, which includes recommendations for the coming year, completes both the audit phase and the current year’s budget cycle.
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