Fundamentals of Budgeting in Business Financial Management


In today’s world, most businesses focus on the day-to-day activities of their operations and lose sight of the internal progress tracking and performance review. Without a well-thought-out budget, a company risks being lost in a dark alley of utter chaos with no clear action plan to guide it. The budget tool links strategies to objectives, which must be measurable and have goals. Due to different management and resource barriers, many business owners, particularly the ones in small and medium-sized enterprises, miss the wider picture and run their businesses without a properly set out budget tool to help steer the organization on the right path.

Preparing a budget helps comprehend how much money is available, how much was spent, and how much money will be needed in the future. A budget guides sound business decisions such as minimizing unnecessary spending, hiring more employees, or purchasing new equipment. If a business ends up with insufficient money, the budget might guide on how to adjust the business plan or prioritize spending on activities.

Structured planning can make all the difference to the growth of a business. It builds on improved team motivation, provides control and direction, and helps with performance evaluation. It enables the concentration of resources on improving profits, reducing costs, and increasing returns on investment.

Business owners must set aside time, shift perceptions, and develop a budget tool that will be used by all employees for the benefit of the organization. Executives must ensure that their company has a balanced strategic plan that gives them a competitive advantage over their competitors to protect their long-term profitability and market share.

Businesses can use Kaplan and Norton’s balanced scorecards to provide a balance of financial and non-financial factors that are monitored by business-specific KPIs. This builds up a notion of not relying on a single indicator to predict a company’s success. The following measures are recommended by the theory:

  • Financial metrics
  • Customer evaluations
  • Process evaluations
  • Metrics for learning and development

To properly set plans, businesses must be guided by a complete overview of their operations. The overall business umbrella can be broad, and it is recommended that budget strategies be divided by departments. Each department develops its budget, which is overseen by departmental management and then merged to create a master budget. This ensures targets are set for each department making it easy to assess and track performance.

Budgeting Processes

Before developing a budget, business managers must first determine the best approach. A business that has negative historical performance or with no historical figures to guide their budget estimates should focus on zero-based budgeting for which every cost is justified while performing business forecasts. Also, some estimates based on the performance of competitors and an understanding of the components of a budget can act as a good guiding tool for forecasting.

Another most common type of budgeting is incremental budgeting, which involves taking the previous figures and multiplying them by a factor year on year. This includes expounding on the previous quantitative strategies to build the business growth strategy. Businesses can also use the value proposition budgeting to critically ask hard questions about their costs. It examines the historical cost and compares it to the value it created, scraping out all costs that did not add value to the business.

A company can choose one of the approaches, but the strategy should not be fixated on any one approach. Experts argue that the approaches are slow and inflexible, and their lack of agility prompted the development of Beyond Budgeting guides to help business leaders be more responsive in dealing with unpredictability under the set guiding principles of value, governance, transparency, teams, trust, accountability, goals, rewards, planning, coordination, resources, and control.

Team Involvement In The Budgeting Process

Executives and business managers must be careful when developing and implementing a budget for their team. This will influence how enthusiastic people will be. Higher levels of enthusiasm will result in hitting and exceeding the set goals.

Imposed budgeting is a top-down approach in which management creates the budget and then imposes it on lower-level management for implementation. Even though it is faster and less expensive, imposed budgeting results in a lack of motivation from employees because of the exclusion, they feel their contributions are inconsequential to the business growth.

Negotiated budgeting is a more extensive approach with joint budget preparation responsibilities. It combines both top-down and bottom-up tactics and does not force budgeting on any employees. It fosters a sense of shared responsibility among corporate executives from various business divisions.

Participatory budgeting is a strategy that inculcates a stronger sense of ownership in lower-level managers for the budget that results. It helps businesses to offer their employees a sense of ownership and control over their finances.  Though it may take longer because of the huge number of staff engaged, participatory budgeting produces more feasible budgets than top-down budgets. It improves morale and motivates people to work better.

Successful organizations devote a significant amount of time and attention to developing realistic budgets because they are an effective means of measuring how far the company has progressed toward its objectives. Budgets serve as a road map for companies It assists in the forecasting of business cash flow, identifying functional areas that require improvement and running company operations smoothly. When performed correctly, the process should involve the senior management, the financial team, budget managers, and supervisors from all the departments and come up with a master instrument to help steer a business towards success.

Author: Victor Otieno