When companies create their financial plans, they need a way to accurately measure how their company is performing in relation to how much money they have. Businesses have money stored in non-liquid sources like long-term equipment as well as assets with high liquidity, like cash. To operate successfully, the business needs to match expenses and liabilities to the money it brings in. The budget, one of the most common financial statements, allows companies to do this. The budget cycle is the framework in which the budget operates.
Simply defined, a budget cycle is how long a budget lasts. The time between one budget and the next is known as the budget cycle. This is no set length of time, and it varies based on the company. Some companies may want to create budgets every year, while others may base budgets on two-year cycles instead. Intra-company budgets for specific projects may have monthly or quarterly budget cycles so companies can keep close track of their progress.
The purpose of a budget cycle is tied to the purpose of the budget itself. Companies often use their budgets as a form of analysis, forecasting what they believe their future costs and revenues will be, then updating the budget as they move along. Once the budget term ends, they can compare their projected budget with the actual budget to see how they progressed. Without the budget cycle, budgets would be constantly updated with no clear endpoint for analysis.
Formation and Enactment
The first stage of the budget cycle is the formation and enactment of the budget. In this step, employees analyze company finances and forecast events like sales, interest and expenses to create a projected budget of all the expenses the business will incur, and all the revenues it will create. Once this budget is formed, the company will enact it, basing all current spending decisions off the budget in order to meet its projected levels.
Auditing the Budget
At the end of the budget cycle an auditing period occurs. This gives employees a chance to examine the projected budget versus what the actual (now current) budget says. If there is any gap in expenses of revenues, this can point to sudden market changes, faulty analysis or a notable difference in sales (either positive or negative). These are important details that a company can use in the next budget cycle to plan more accurately and make useful long-term decisions.