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The corporate budgeting process can be messy.
Perhaps not for every company – but for enough that it becomes a major problem. In some organizations, budgets are not done until too late, or even not done at all. On the other hand, some companies have overly pedantic budgets that do more harm than good.
What’s more, corporate budgeting often consumes a large amount of time, forcing executives into tedious rounds of negotiations and meetings. It can unintentionally encourage managers to lie, or even cheat, inflating results and setting deceptive targets.
This is why it’s so crucial to thoroughly understand budgeting for business and create an environment that does not penalize truth telling.
Introduction to Strategic Budgeting
For companies, budgeting provides an action plan for managers and a point of comparison at the end of a period. There are various types of budgets used, including master budgets, static and flexible budgets, and operating budgets.
But the corporate budgeting process can be challenging, especially if sales and revenue are intermittent or clients do not pay on time. However, whether your organization budgets annually or more frequently, there’s no reason to bite your nails at the thought of budgeting season – as long as you have the right processes in place.
How to Budget Effectively
The most effective budgeting for business depends on company culture. When it is aligned with your organizational strategy, KPIs and goals, it will transform from just something that needs to be done to a driving force, eliminating silos, connecting dots, and bringing the organization together.
When organizational strategy is at the heart of your corporate budgeting process, it helps to ensure that resources are allocated so that your business operates smoothly, reaches its goals, and meets market demands.
Corporate Budgeting Best Practices
In all likelihood, there is no one correct way to develop a budget. How to budget will depend on numerous factors, after all. Having said that, here are some important steps that can help guide you through the process.
1. Compare the Previous Period
Your starting point should always be going through the existing data you have. Hence, you should see what happened during the previous period. Some questions you should consider are:
Was the budget easily enforceable? Did employees follow it?
Did you spend less or more than anticipated?
What were the unexpected shortfalls or hurdles, if any, and what caused them?
Were your assumptions about your growth accurate?
Were your assumptions about your industry accurate?
Ideally, do this at a high level, and ask individual budget managers to undertake the same for their own scopes. Don’t forget to consult with other team leads – the best budgets are always collaborative.
2. Pay Managers for What They Actually Do
This is more a consideration than a step, but it’s an important one.
Remember that problem about unintentionally encouraging managers to lie? A good way to solve this is to provide rewards that are independent of budget targets. That is, you reward people for what they do, not what they do relative to what they say.
This will remove incentives to lie. If unit managers do not receive a fat pile of cash for exceeding a target, they do not have the motivation to falsify information. This way, senior management can receive unbiased estimates for future planning, thus improving the quality of the planning.
3. Understand Your KPIs and Drivers
To know where to allocate resources, you need to understand the factors that most contribute to your organization’s growth.
This will also make it easier to model scenarios to help understand how they may affect your future performance.
It is important to remember that non-financial metrics can be just as crucial to your budget as financial ones. Make sure they remain in your line of sight.
3. Set Out Fixed Costs & Variable Costs
Fixed costs, also called “overheads”, are costs over which you have little to no control. More importantly, they are not impacted by your sales. That is, whether your business is successful or not will not affect the amount you need to pay.
Website hosting & servers
Utilities (internet, electricity, etc.)
Mortgage or rent payments
Interest on loans
Generally, you can comfortably plan for fixed costs, assuming that you have your insurance and office space sorted and you know your employee headcount.
Variable costs, on the other hand, are more fluid. Often, they are considered “discretionary” expenses. Examples of variable costs include:
Client meetings & travel
Advertising & marketing
Office renovations & décor
Corporate donations & investments
Software subscriptions that are not critical to running your business
Discretionary expenses are important, but when creating a budget, they need to be considered more critically. Generally, when a business is in danger of going over budget, discretionary expenses are the first to be slashed.
Aside from fixed and variable costs, you should forecast additional spending. These can include one-off expenses. For instance, consider the expenses for a major merger or acquisition, special events, or consultants to help prepare for an audit.
These irregular expenses should, if possible, be set out separately in the budget. You will need to account for them, but they generally will not be a core piece of your spending for quite some time.
Lastly, you might want to consider a fund for a “rainy day”. It will benefit your company in the long run to set aside a portion of your budget in case of any unexpected events, such as geopolitical turmoil, natural disasters, and so on.
A corporate budget is definitely not a “set and forget” procedure. As the year progresses, you will always need to check back, update and analyze your spending. What’s more, you should never forget taxes (including sales taxes and state and federal taxes) and seasonality, and never exaggerate estimated profit and revenue.
Ideally, you should set budget reviews from time to time. Start with a monthly review, and gradually ease into a more comfortable schedule. If you find that you don’t need to make changes that often, you can start reviewing your budget every three to six months.
All this, while necessary, is going to put a strain on your financial team. That’s why NextGen Accounting is here to help.
We offer credit card reconciliation services, bank reconciliation services, reconciliation automation, financial consulting, financial reporting, and audit and anti-fraud assurance. Our services are specially tailored to firms with vast amounts of data that are extremely difficult to reconcile.
To give you the fastest and most accurate reconciliation, we use our patented software CrushErrors, which you can also obtain as a product if you’d rather conduct reconciliations in-house.
NextGen Accounting’s management team has decades of experience and includes former executives of Barclays Bank, Bank of America, and ICBC. Contact us today for reconciliation services or book a free demo if you’d like to get CrushErrors!