Budgeting is one of the most critical financial tasks that many businesses perform. The budget establishes a blueprint for your company’s finances and gives your department managers parameters for spending and other financial decisions throughout the year.
Many companies will conduct budgeting exercises for 2019 over the next few months. This makes now a good time to review some budgeting best practices for small and mid-sized businesses.
Limitations of Traditional Budgeting
At many businesses, the budgeting process looks like this: Department managers are asked to project spending and revenue for the next year. So, they make assumptions and forecasts, crunch the numbers, and produce a preliminary budget based on the results. This budget is then passed back and forth and tweaked until a final budget is approved and shared with everyone responsible for making financial decisions.
The problem is that changes inevitably occur in the assumptions that drove the numbers. This static and inflexible budgeting process can lead to inaccurate data and poor financial decisions.
Instead of following the traditional budgeting process, some businesses are adopting a more flexible approach that accommodates changes that occur throughout the year. An annual budget is still prepared, but it is adjusted each quarter based on the most recent sales numbers and financial performance.
This new approach to budgeting can yield a host of benefits for your business. By working with current financial data, you’ll have more flexibility to make adjustments on the fly as business conditions change. This can lead to better decisions and improved overall financial performance.
By removing much of the guesswork and adding more certainty to the budgeting process, it also relieves some of the pressure on department managers and employees to hit numbers that are no longer realistic. And it can eliminate wasteful business practices, such as when department managers spend money that’s budgeted on things they don’t really need simply because they don’t want to lose it.
Big-Picture Budget Thinking
As you prepare for budgeting exercises this fall, take time to think about budgeting from a big-picture perspective. In other words, how will your budget be used to maximize your company’s financial performance?
Most companies use their budget mainly as a cash control instrument. But it can also be used as a management and operational tool. For example, by monitoring and recording variances in the numbers from one budget period to the next, you can spot financial trends and take proactive steps that lead to higher sales and profitability.
It’s also important to work on getting budget buy-in from department heads and managers. They need to see the value in the budgeting process instead of just viewing budgeting as another chore they have to do. These are the individuals who will be responsible for implementing the budget, so it’s important that they see value in the process.
A Firm Financial Foundation
Keep these guidelines in mind as you prepare for the budgeting process in the coming months. Doing so can help you establish a firm financial foundation for your business in 2019.