How Can a Budget Facilitate Communication Within an Organization?

A budget, also referred to as a plan, is a forecast of the resources required to accomplish the small-business owner's objectives and the financial results the company expects to achieve. The budget is usually prepared on an annual basis, but some business owners look at how actual results are trending on a quarterly basis and adjust the budget for the upcoming 12 months. The budgeting process, when done correctly, fosters communication within an organization.

During the budgeting or planning process, a small-business owner and his team set goals for the upcoming year, including revenue targets, productivity goals such as increasing gross margin percentage and qualitative goals such as improving the company's visibility within the community. The owner should solicit input from the members of his team when preparing the goals. This communication is important because the CEO will hold team members accountable for reaching the goals. Managers and staff members should be given the opportunity to express whether they believe the goals are reasonable. The owner should clearly communicate the reasoning behind the goals she set. Without this communication, staff members may resent the goals as being too difficult to achieve.

Department managers are often asked to prepare their own budgets, which the finance team consolidates into a company-wide budget. The business owner will review the budgets, and a back-and-forth negotiation process takes place in which the managers are asked to show why they need the requested budgetary increases. The budget serves to open lines of communication in which both parties express their support or hesitancy to fund the budget requests.

Part of the planning or budgeting process is to determine the human and financial resources required to implement the company's strategies and action plans. The owner and his team create a timetable for the completion of the action plans and assign responsibility for the completion of each task. The team is essentially mapping out the company's future course in great detail. Each staff member must coordinate her efforts with others in the organization who are assigned tasks related to the same strategy. Communication is required among all staff members involved to make sure that the tasks will be completed on schedule -- and it is an essential element of teamwork.

After the budget is implemented, the owner and managers will compare actual financial results with what had been forecast, then review the results and analyze the reasons for any significant variances. For variances that are not one-time anomalies, the owner may decide a change in strategic direction is required to bring actual results closer to forecast. The budget vs. actual comparison reports are a basis for discussion among team members, allowing them to communicate changes in the business environment that require management's attention. For example, a new competitor may have entered the market, negatively impacting the company's sales results. Timely communication of the variances and reasons behind them allows the team to make strategic changes to address any negative issues before they severely impact the company's operating performance or its competitive position.