Every company should have a well-thought-out budget that considers the goals of the company, the motivation of employees and the financial limitations of the company. Additionally, the company should consider both the previous financial and business activities of the company as well as the goals the company holds for the future.
Before figuring out the company's budget, the budgeting committee or other key decision makers must set objectives for the future of the company. Objectives could include cost savings, for example, which would require a very different form of budgeting than objectives for expanding a company to a second location.
Determining Available Resources
A business's objectives should influence the budgeting process but certainly should not dictate it entirely. A business also must analyze available resources and determine what it has available to reach its objectives. Indeed, the available resources may dictate, to a large extent, the company's objectives. Available resources are not limited to the cash the company has available but also could include potential loans or additional outside investment. Additionally, a company must consider its sales projections for the coming year.
Projecting Future Needs
A budget is forward looking and requires some amount of estimation. It is obviously impossible to predict with perfect accuracy what your organization's future budgetary needs will be. There are, however, some important sources of data you can look at to reach an estimate. These sources include past company data, any available data on competitors and an analysis of current and developing economic and regulatory trends that may make the coming year different in any way from previous years.
Match Future Needs to Available Resources
More often that not, your available resources will not fit perfectly with your projected future needs. It is at this phase of the budget cycle that you may need to do some compromising and negotiating among your departments to determine how best to allocate your company's scarce resources. You must keep the business's priorities and strategic needs in mind when going through this process.
Obtaining Final Approval
Once you have a complete budget worked out, the next step is to acquire approval from the budgeting committee or whatever entity is empowered to make the final yes or no decision on your budget. The more rigorously you have worked to address the needs of all of the key stakeholders during the previous steps, the smoother this process should be.
Distributing the Approved Funds
Once the budget has been finalized and approved, the final step of the budgeting process is to distribute the allocated funds to the various departments and business segments. Typically this is the duty of a chief financial officer or company controller.
Monitoring and Evaluating
Once the budget has been finalized and the funds distributed, the budgeting process is not over. You should still actively track the success of the budget you have created and implemented. Look for areas where resources are lacking or where waste seems to exist and keep these areas in mind for future budget cycles.
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