What Is the Budget Cycle?
The budget cycle refers to the life of a budget from creation to evaluation. Although small businesses might not define the budget process, they use the process when they painstakingly work through the steps required to build and implement a budget.
The budgeting process progresses in stages: Plans are made, funds are allocated and new information leads to revisions. The four segments of the budget cycle diagram — preparation and submission, approval, execution and audit, and evaluation — provide the framework for creating one of the most important tools a business needs to succeed.
The budget cycle is the process in which companies and governments create, evaluate and approve budgets.
The budget cycle is common to government agencies that are required to use transparent budgeting processes, but the concept is easily adapted to the needs of businesses. The budget cycle promotes due diligence and accountability because research, past performance and financial projections feed the process. Decisions are also documented at each stage.
The clearly defined segments of the budget cycle encourage a careful process that allows for input and revision as you work to build the budget that works best for your business. The budget cycle usually begins in advance of the company’s accounting period and ends well after that period ends.
During the preparation and submission segment of the budget cycle, the business considers the numbers and makes decisions. Your business might have several departments that submit projections for their budgetary needs, or your budget might be a simple document that requires little input from others.
The completed budget is submitted to the individuals who need to review, make recommendations and approve it. This might occur between you and an accountant. The budget might move back and forth between preparation and submission until all parties accept the document.
The formality of the approval segment depends on the size of your business, but approval of the budget makes it official. The budget cycle in public finance requires elected officials and high-level managers to approve government budgets. But a sole proprietorship only needs the owner’s approval. Meanwhile, budget approval for a larger business is the responsibility of boards, committees or authorized executives.
While an individual owner might make changes at will, a business with more employees likely will require adherence to the budget unless changes are authorized. The execution segment begins at the start of the company’s accounting period, such as the fiscal or calendar year. Monitoring and control of financial activity occurs during execution. Adjustments are made as needed as the budget is implemented.
The audit and evaluation segments occur after the accounting period ends. An internal or external audit examines the financial activities during the accounting period, assesses compliance with the budget and measures the accuracy of projections used to create the budget. The evaluation provides a final report on the budget and the audit and makes recommendations for the next budget cycle and budget.