People may skip budgeting for their personal finances (and they really shouldn’t), but it is a must for organizations. Your project lead may be just a tat behind in submitting the new project plan and attributed it to the budget which is taking just a little longer than expected. Your project lead is not alone. The “budget mental block” is real. This “how-to” guide is written for all small and large entities. Depending on the time cycle that makes sense for the organization, budgeting may be done at various times of the year.  

What is a Budget? (Come on now, there are no dumb questions)

Many of you are thinking about what you need to do in the next twelve months and perhaps your financial goals. 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 budgeting, 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.

Budgeting in Context

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:

1.     Establish mission, vision and objectives

2.     Conduct situational analysis

3.     Identify and assess options to fill the gaps that exist

4.     Prioritize options and formulate implementation plans

5.     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 into 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 neither of those things because they are simply plans expressed in numbers.

The Value of Budgeting

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.

5 Steps of Budgeting

So, how can we actually prepare budgets? Well, that is as simple as 1, 2, 3, 4 and 5…

Step 1: Define priorities for the upcoming year and ensure that it is tied to the long-term strategy

Step 2: Determine revenues, especially the ones that are absolutely confirmed

Step 3: Calculate annual burn rate (or operating costs) and significant capital expenditure that will be incurred

Step 4: Prepare cash budgets and income statements

Step 5: 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.

For more information on financial governance, management and strategic planning, please check out ZN Advisory.