Budgeting 101
It’s that time of the year - again! Some call it the year-end and some say it is the start of the year. Many of you are thinking about what you need to do in the next twelve months. It is after all the final quarter of the current fiscal and that simply means that activities and plans for the next fiscal must be finalized for a smooth sailing. One such plan is a budget. Yes, that is correct. A budget is a plan expressed in numbers and nothing more. It follows a simple and practical approach but the idea is for us to really think hard about our future goals and objectives, and express these often vague thoughts in numbers. By doing this, we force ourselves to be realistic and it significantly helps us in identifying the sources of funding that can pay for the various costs that we will incur to achieve our vision.
When it comes to an organization's annual planning and budgeting exercise, there are usually five key phases. It does not matter whether one is a non-profit or a for-profit organization. All organizations go through the following phases:
Establish mission, vision and objectives
Conduct situational analysis
Identify and assess options to fill the gaps that exist
Prioritize options and formulate implementation plans
Perform, review and control the execution efforts
The fourth step above is where annual budgeting fits in. It involves selecting the best course of actions and formulating implementation plans that align with an organization's overall strategy. Such plans are the broken down in to a series of short-term plans, usually for each business unit. These plans are basically the 'budgets'. A budget, in essence, is a business plan for a short-term, typically a year, and is expressed in financial terms. It converts long term plans into actionable items for the immediate future. It is critical to have budgets align with the overall strategy of an organization, which includes the vision, mission and objectives. Budgets are forward-looking and realistic plans, expressed in financial terms, that assist an organization to achieve its goals. Many people think of budgets as forecasts or predictions. Guess what? They are not because they are simply plans expressed in numbers.
Budgeting is a useful tool for any organization because it promotes forward thinking and allocates limited resources in line with goals and priorities of an organization. It helps with identifying short-term problems and co-ordinates activities between different departments of an organization. Additionally, it motivates departmental managers to achieve their targets and improve performance while providing them with means to control their activities respectively. Essentially, budgets act as yardstick to evaluate managerial and departmental performance while creating a system of authorization and delegation.
So, how can we actually prepare budgets? Well, that is as simple as 1, 2, 3, 4 and 5… You can follow the five steps listed below:
Define priorities for the upcoming year and ensure that it is tied to the long-term strategy
Determine revenues, especially the ones that are absolutely confirmed
Calculate annual burn rate (or operating costs) and significant capital expenditure that will be incurred
Prepare cash budgets and income statements
Finalize and present consolidated or master budgets
With that, we hope that this simple approach can help you prepare your organization for the upcoming year and pursue the path of being financially self-sufficient.