Business budget – these are the things that everyone should know
A relatively small portion of the personnel deal directly with company’s business budget, but it affects everyone regardless of their title. All employees undoubtedly care about the company turning a profit, and that their jobs are secure in the future as well. Reviewing the budget might therefore be one of the most interesting parts of monthly meetings and kick-offs. It is also important for the business managers that all employees take an interest in the business budget, internalise it, and commit to it. How to get the employees committed to the business budget then? How is the budget planned and how is its implementation tracked? We will take a closer look at these things next.
The business budget is the backbone of all operations
The business budget is an estimate of the monthly or annual expenses, revenue and financial performance of the business. Like reportage, the main function of the business budget is to help with decision-making and planning of the company’s operations. Without a budget, the employees have no sense of the company’s financial status at the present moment or in the future either: it is impossible to know how things are going and what the future holds. How could you make decisions regarding the hiring of new employees or the launch of a new line of products in such a situation?
Many might have heard the claim that budgeting is unnecessary in the fast-paced modern world with its need for real time responses. This is not true however, for budgeting and accurate prediction of the company’s future is possibly more important than ever before. However, it is true that in today’s world one can not make do with an annual budget, if it is static and sluggish and left to rest on its laurels. Flexibility, interpretation of surrounding signals and the ability to react quickly are essential qualities in today’s budgeting. Budgeting and forecasting should be viewed as an ongoing process, rather than a once-a-year project.
Business budget: annual or rolling forecast?
There are as many examples of business budgets as there are companies themselves, but they all adhere to the same principles. Usually budgeting specifically means the making of an annual budget. The annual budget will create the frame for the coming year. Although the modern world is fast-paced and companies sometimes have to adjust their budgets swiftly, preparing an official annual budget is important. The annual budget is a long-term plan for carrying out the company’s strategy, as well as a tool of financial management that forms the frame for coherent decision making.
An annual budget is almost like the blueprints of a house. The goal is to build a house just like this, but changes can be made along the way. The annual budget is therefore not a set in stone roadmap that is blindly followed, but rather it must be altered with projections over the course of the year. Without continuous forecasting and monitoring, the benefits of budgeting are minimal, even if it had been prepared with care.
What does rolling forecast mean? In the rolling forecast, the cycle of financial planning does not necessarily entail a calendar year or an accounting period, but rather some other predetermined time frame. Months are added to the forecast after the previous months’ outcomes have been tallied. The drawing up of a rolling forecast provides the company with information that is always up-to-date and accurate. A possible risk it entails is that the big picture becomes harder to distinguish, if the time frames that are being forecast are too short, and the forecasting is not accurate enough.
The budget of the company is a matter for the entire organization
The creating and updating process of the business budget must be clear, transparent and based on realistic estimates. This way the employees are more likely to commit to the budget and the common goals. The drawing up of a budget should be viewed as a participatory process, rather than a finished one-sided economic forecast that is given to the employees. In an optimal situation, employees participate in the making of the budget, and they are heard when making projections on the financial numbers related to their domains. Once the business budget is ready, the management should explain the budget’s calculations when necessary: what are the numbers based on and what are the things that they affect? If the budget’s goals involve pay for performance or bonuses, it is important that they are seen as fair and that their attainment is viewed as possible.
A company’s budget is therefore a joint effort of the entire organisation. Modern tools help in implementing a “bottom-up”-style budgeting process within the organisation, that the employees can be committed to. When the input of forecasts is decentralised in the entire organisation, their accuracy improves. Along with committed employees and more accurate forecasts, the benefit of participatory budgeting is that the financial management is left with more time to analyse data and prepare various scenarios.