A budget is a quantifiable representation of your strategic objectives.

As a result, having a solid budget in place is critical to drive your profitability as well as avoiding a variety of negative repercussions that may develop as your firm expands. 

To get you ready for the new budget season, we’ve put up a 9-step budgeting guide and a budget monitoring checklist that we feel is the foundation for a standard budgeting approach. 

Budgeting in 9 Easy Steps 

There is no one-size-fits-all approach to budgeting.

As your company proceeds through its life cycle and its goals change, you may discover that one or two steps are required to be added to the budgeting checklist that we provide here: 

Stage 1: Establish objectives. 

Before you begin working on your budget, you must first define your goals and convey them to all stakeholders in a clear and open manner.

A clear set of organizational-wide goals, among other things, helps individuals understand what the budgeting process is aiming for and what they can do to make the process easier. 

You should take a long, hard look at the situation and consider if the budget you are putting up is intended to foster development or to sustain the present status quo.

Overall, your goals should be specific and quantifiable. 

A budget, and its objective, are moulded by the management structure of the organisation, and may be: 

As with the top-down strategy, high authorities impose execution on mid-level executives, as in the bottom-up method, functional managers put up separate proposals for approval. 

As with the negotiated strategy, both top executives and intermediate management were compromised. 

Stage 2: Think about your financial policies and processes. 

In line with the ever-changing organisational environment and market conditions, the budget, and therefore the budgeting process, is now completely subject to dynamism and complexity. 

As a result, having some type of formal budget schedule or budget manual in place is now an acknowledged norm in organisations of all sizes and styles. 

A budget manual in the case of SMEs might be as basic as a computerised or paper-based guideline that is formally distributed throughout the organisation.

In the case of large organisations, it may end up becoming a collection of long-winded financial rules and procedures outlining strategic and financial goals and instructing the budget-setting process. 

Stage 3: Revisit historical assumptions. 

In general, it depends on the budgeting technique your organisation uses, although using the previous period’s assumptions and modifying appropriately (as is typical of conventional planning) may be a suitable starting point for this year’s prediction. 

Stage 4: Think about the issues that are restricting you. 

Limiting variables are those elements that limit growth and impede sales volume and output, such as a scarcity of resources, a lack of labour or raw materials, or a fluctuation in demand. 

Because they have a direct impact on and may be destructive to your planning and budgeting efforts, a comprehensive study of these aspects must be performed straight away. 

Stage 5: Monitor the flow of funds. 

Keeping track of current financial asset inflows and outflows can help you improve your variance analysis and discover deviations from the projection. 

Stage 6: Think about fixed and variable costs. 

You may discover that correctly projecting revenue for the following period is impossible, but managing costs is undeniably doable.

Fixed costs and variable costs are generally the two categories of expenses that must be analysed and separated. 

• -Fixed expenses, such as rent, depreciation, and administrative expenditures, remain constant regardless of changes in sales and output, similarly, fixed expenses, for example, are typical of software firms, whose investments are mostly directed toward technical equipment.
• -Variable expenses, such as raw materials, direct labour, and packaging, are directly related to variations in sales and output, for example, variable expenses account for the majority of a consulting firm’s spending, with consultants and their commission accounting for the lion’s share of costs. 

Managing these expenses is vital in part because operating leverage, which is simply described as the ratio of fixed to variable costs, must be balanced out or the firm will face risks and uncertainties.

The more the operating leverage, the greater the likelihood that your company may be exposed to uncalculated risk. 

Stage 7: Make use of a suitable budgeting approach. 

There is, once again, no one method to create a budget.

To determine the appropriate budgeting approach for your organisation, we believe you should research its model, needs, and other affecting elements both inside and outside the firm. 

Many alternative budgeting and planning systems have been produced as substitutes for the standard method when the organisation expands and the market evolves or fails. Some of the most common procedures, including the traditional one, are as follows: 

• Incremental budgeting (traditional budgeting): this is as simple as making little changes to the previous budget. 
• Zero-based budgeting: By beginning with “zero,” every expenditure must be justified based on its relevance and value to your organisation. 
• Rolling budgeting entails introducing a new budgeted period incrementally whenever the preceding one expires at certain intervals. 
• By adopting an activity-based analysis, in which important cost drivers are identified and are the primary focus, you can allocate funds more efficiently and effectively.

Stage 8: Gather further information and establish a budget. 

Before you finalise your budget, be sure you check the following boxes: 

• Divisional managers, for example, have the key to uncovering information about the business that might aid or hamper your budgeting and planning  attempt, make certain that you properly communicate the process to them and that you leave no stone unturned in your pursuit for their important contributions and opinions. 
• If you overlook external considerations, every figure on your budget will be incorrect, as a result, the following step is to go through all of these influencing elements, which might include the inflation rate, market circumstances, and interest rate, to mention a few. 
• Because a budget affects every element in your organisation, it must be a collaborative effort to acquire traction from these personnel, as a result, make certain that you collect their budget change requests. 
• Check all of the statistics one final time to ensure that they are still in line with the goals,this might be accomplished by reevaluating your initial budget or discussing with your accounting department. 

Stage 9: Formally publish the budget. 

The budget is ready to be released once you have replied correctly to all of the requests for changes from stakeholders, either by rejecting or complying with them.

If required, conduct a budget-based pilot experiment. 

Guidelines for budget monitoring 

You may have realised that creating a budget is simply one link in a long budgeting chain. And, because data ages fast, you may need to implement a budget-monitoring method.

1. Ensure that each metric adds value.

To guarantee that your final budget is a worthwhile endeavour and that your whole planning and budgeting process is a value-added enterprise, every cost should be monitored and justified on a regular basis for the following characteristics: 

• The degree to which the expenditure is relevant and important to the firm. 
• Expenditure categories and totals 
• Methods of meeting expenditures 

2. Contact the accounting department

As obvious as it may appear, many organisations neglect this step, however, the accounting department is a data warehouse that can offer all of the figures and information required to create a budget at its most basic level.

3. Establish a monitoring procedure.

Putting in place a solid monitoring system is a smart decision that keeps you on top of all expenditures and income. This budget monitoring technique must also be scalable and adaptable to your changing growth requirements.

As a result, it must be adjusted particularly to your company’s model and demands. 

 4. Establishing a budget monitoring timeframe.

Determine the time range or frequency with which you wish to revisit and reassess the budget. Depending on the objective of the budget, it might be daily, weekly, or monthly.

5. Recognize and resolve discrepancies

Utilize the information at your disposal to detect and calculate deviation from predictions.

These deviations are unavoidable (after all, that is what the budget is intended to be – scarcely right), and they may be: 

• If you have underspent, this might be either positive or negative. 
• If you have overspent, this is a negative or unfavourable outcome. 

One method for resolving budget variation is to ensure that all stakeholders are kept up to date on budgeting performance.

Knowing how well one’s expenditure matches the projection will provide them with the foundation for supplying you with vital information to take suitable corrective steps.

6. Iterate on your monitoring procedure.

To account for the market’s volatility, make planning and budget monitoring a continual activity. 

Diamond Professional Consultants specializes in Business Intelligence softwares that give you instant reports to speed up the decision-making process. 

Read more about our Business Intelligence services.

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