The Organizational Budgeting Process

Having a formal and structured budgeting process is the foundation for good business management, growth and development.  Very similar to our personal finances, discipline and planning should be the cornerstone of a business budgeting process.

So where do we begin?  As with most things in managing an organization, budgeting needs to be driven by the vision of the organization and the strategic plan.  Organizations that stay focused on their strategy and plan know exactly where they want to spend their resources and have a plan to help keep them from spending in areas that do not line up with the vision.

So what are the steps to budgeting?

Strategic Plan

Having a well thought out strategic plan that supports the vision of the organization is the first step in any budgeting process.  When company resources are used, it is imperative that the spending supports the strategy and development of the organization.

Business Goals

A well thought-out strategic plan generates annual business goals.   It is these goals that need to be funded by the annual budget.  Developing goals is the first step to the budgeting process.  Accountability for achieving goals is the responsibility of the board or business owner.

Revenue Projections

Revenue projections should be based on historical financial performance as well as projected growth income.  The projected growth may be tied to organizational goals and planned initiatives that will initiate business growth.  For example, if a goal is to increase sales by 10%, those sales projections should be part of the revenue projections for the year.

Fixed Cost Projections

Projecting fixed costs is simply a matter of looking at the monthly predictable costs that do not change.  Employee compensation costs, facility expenses, utility costs, mortgage or rent payments, insurance costs, etc.  Fixed costs do not change and are a minimum expense that need to be funded in the budget.  For example, if there are open staff positions, the cost to fill those positions should be part of fixed cost projections.

Variable Cost Projections

Variable costs are costs that fluctuate from month to month supply costs, overtime costs, etc.  These are expenses that can and should be budgeted and controlled.  For example, if Christmas sales drive overtime costs temporarily, those costs should be budgeted.

Annual Goal Expenses

Goal initiatives should also be given budgets.  Each initiative should have projected costs associated with the goals.  This is where the cost of implementing goals are incorporated into the annual budget.  Projections of costs should be identified, laid out and incorporated into the departmental budget that is responsible for that goal.  For example, if the sales department has a goal of increasing sales by 10%, costs associated with the increased sales should be incorporated into that budget.

Target Profit Margin

Every organization, whether they are for-profit or not-for-profit, should have a targeted profit margin.   Profit margins allow for returns for investors.  Not-for-profits profit margins go back into the facilities and development of the organization.  Profits are important for any and all organizations.  Healthy profit margins are a strong indicator of the strength of an organization.

Board Approval

The governing board, president, owner or head of the organization should approve the budget and keep current with budget performance.  Again, similar to your personal finances, the owner should be reviewing monthly financial statements for the following reasons.
1. To monitor budget performance.
2. To be familiar with all expenditures.
3. To safeguard the organization against misappropriation of funds or employee fraud.

Budget Review

A budget review committee should meet on a monthly basis to monitor performance against goals.  The budget review committee should review budget variances and assess issues associated with budget overages.  It is important to do this on a monthly basis so there can be a correction to overspending or modification to the budget if needed.  Waiting until the end of the year to make corrections could negatively affect the final budget outcome.

How to Deal With Variances

Variances should be reviewed with the responsible department manager and questions should be raised as to what caused the variance.  Sometimes unforeseen situations arise that cannot be avoided so it is also important (just like your personal budget) to have an emergency fund to help with those unplanned expenditures.  For example, if the HVAC system suddenly goes down and needs to be replaced, this would be a budget variance.

Good budgeting processes can help develop and advance an organization, while sloppy budgeting and monitoring of budgets can blindside an organization and affect the long-term viability of an organization.

Finally, without customers, there are no revenues to budget.  For this reason, strategic plans and budgets should be targeted at one thing and one thing only: the customer.  This is why it is imperative to identify who your customers are, find out what they want and put systems and processes in place to meet their needs.

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