What is budgeting
Primarily, budgeting is managing a project or a company budget in terms of its development, approval and implementation. This kind of financial planning is needed to organize a company work at a high level and to achieve the set goals. But, if funds are allocated correctly, budgeting functions can be much more diverse: a budget can be used to monitor and evaluate performance, motivate and even train employees. Enterprises and large projects often need not just manage their budget. They need a budgeting system, that is, well-functioning rules of interaction between different departments and divisions, clearly defined powers and responsibility areas for each department in the process of the budget development.
Usually, for budgeting an enterprise or a large project, several interrelated production and financial plans are developed. These plans can be long-term or short-term depending on what challenges the team is facing. Budgeting objectives should be set based on these tasks.
Different companies and projects may have completely different budgeting objectives and, as a result, completely different budgeting stages. In order to get a good result, it is worth concentrating on the elements that are important for a particular company. A company can budget to achieve one or more goals depending on its objectives. The main budgeting objectives are:
- Planning. Planning is particularly relevant for companies that are intensively growing. Budgeting makes it possible to set a budget for the costs of scaling up the business, opening new branches or outlets.
- Allocation of resources. With budgeting, resources can be allocated with maximum efficiency. All risks can be taken into account in advance, and funds can be set aside to deal with negative incidents.
- Performance evaluation. The process of budgeting involves setting performance indicators and financial benchmarks. This strategy allows assessing how efficiently a particular department is spending money.
- Coordination. Budgeting can set spending limits for managers, limit their spending to departmental needs, and this way control the budget.
As long as you have identified the purpose of budgeting, you need to understand how you can achieve it, that is, go directly to budgeting. It is possible to carry out budgeting competently if you adhere to the correct principles of budgeting.
There are many approaches to budgeting. For each of them, there will be one or other leading principle depending on the management’s preferences. Some budgeting principles are universal because they help optimize the team's performance regardless of an approach taken. These principles are:
- The principle of responsibility. Each department is responsible only for the elements under its control: the processes and results of operations.
- The principle of aligned objectives. Often, teams and divisions need to work together on a common task. Ideally, the objectives should be designed with the views of all the performers taken into account because it leads to greater involvement;
- The principle of permanence of objectives. The objectives set should not change dramatically in the long run. Short-term goals can and should change, but long-term ones that define the vector of community development must be stable. Frequent changes in long-term goals interfere with planning and demotivate the team;
- Principle of continuity. According to this principle, a company's budgeting should be carried out on a regular basis and based on the same approaches.
Approaches to budgeting may vary widely between teams and companies. However, they can be divided into two large groups depending on the budgeting methods applied.
Learning by topic
Increase Business Revenue. Best Pricing Approaches
15 ways to price your product: demand factors, price discrimination, overbooking
All the budgeting methods used by teams and companies can be divided into two large groups:
- budgeting on the basis of a financial structure. This is the most common way of allocating budgets. First, the amount of money each department needs for work is determined and then, according to the needs of specific departments, the budget is planned. The main drawback of this method is that the company or group must be rigidly structured with the responsibility of each division clearly defined and documented. Without an established company structure, the budgeting methodology based on a financial structure may be useless;
- budgeting based on business process allocation. This a relatively recent and therefore less often used approach to budgeting. Resources are allocated to business processes rather than to structural units. A supervisor is assigned to organise the work on each process.
The budgeting methods based on financial structure are more suitable for established companies. Methodologies based on business process allocation can be used for project budgeting.
Learning by topic
Agile Methodology. Effective Business Management
Manage a team, launch a product needed on the market, gain success - using the most popular US methodology
Project budgeting gives greater freedom to the manager, allowing them to try new, including experimental, budgeting methodologies. The budget for solving certain tasks is allocated according to the project management methodology used by the manager. Agile and scrum are examples of new methodologies that enable new approaches to budgeting.
Although the project manager has more freedom, his responsibility is also great: they have to plan the project in the shortest possible time so that it could be successfully implemented. They also need to think over the sequence of works, consider the risks, and manage the budget having all this in mind.
Budgeting a project or company is a complex process on which the success of the entire enterprise depends to a large extent. This is why a manager should take a budget training course before implementing projects.