Building a powerful annual budget that aligns with your company's vision and strategic plans can be a formidable task. However, with timely and accurate preparation, this crucial process becomes the cornerstone for quantifying and achieving your organization's goals. By examining historical data, setting clear company objectives, and developing a comprehensive budgeting process, you can steer your business towards success in the coming year. Learn how to leverage past performance, industry trends, and key business drivers to create a dynamic budget that propels your company forward.
Use industry trends and appropriate local and global economic trends to guide your thinking. Statistics are available from several government and industry sources.
If you have a general idea of the percentage of the total market share owned by your company, use this percentage to help to predict future sales.
Set company goals for the next fiscal year. The goals for the year function as a high-level business plan, detailing certain benchmarks that the company wants to achieve. The budget must be closely aligned with these goals.
When establishing company goals, it is also important to look at the relationships among business factors. For example, if a company goal is to increase profits and decrease expenses, it is important to determine what impact this goal will have on the workforce, on the product lines, or other costs.
The capabilities and limitations of the equipment and employees and a methodical analysis of material requirements, employee capability, and resource availability are also required. The budget must reflect the impact of the goals, relationships among business factors, and the related decisions.
After defining and quantifying past and future trends and setting company goals, develop and document a budget process and budget model. Use a 5-step process to prepare the model that will be used throughout the organization.
1) Decide whether or not multiple budgets are required: Determine the number of different budgets that may be required based on different scenarios, but note that multiple budgets significantly increase the complexity of all of the budget preparation and tracking processes. A common example of a multiple-budget model has budgets based on worst-case, best-case, and mid-range assumptions.
2) Develop a Budget Process Outline: Create an outline that defines the following:
3) Define Budget Guidelines: Overall, the budget guidelines will function as action plans and will allow the organization to adhere to the budget while achieving business goals. To define budget guidelines, develop an overall plan that achieves a certain percentage of revenue growth and appropriate cost reduction. For example, the guidelines should include the specifics of any revenue growth and the business plan to achieve the budget.
A budget merely describes numbers, while the budgeting guidelines function as the plan of action. For example, if next year’s budget reduces employee compensation by 5%, a potential guideline could be ‘to institute a hiring freeze’. Other guidelines may relate to salary changes, expected changes in foreign currency expectations, fluctuations in labor costs, and outsourcing costs.
4) Identify Key Budgeting Participants: Defining the key participants and their roles and responsibilities largely depends on the budgeting guidelines. The structure of the budget, whether created chiefly at the executive level, at the department level, or by every employee of the company, will determine what individuals need to be involved and committed to the process. Determining the key participants also depends on the structure of a company, the number of executives, the number of department heads, and the number of departments.
A related step is education, training, and acceptance of the value of the budget.
5) Establish a Timeframe for Budget Preparation: Determining the timeframe is the final step in developing the budget process. Ideally, the budget for the next fiscal year must be prepared, approved and implemented on the first day of that year, usually January 1st. It is helpful to work backward from this date to determine the key deliverables and deadlines that must be established. A detailed schedule can be helpful to define who is responsible for what and when specific items must be completed.
Overall, an effective annual budgeting process that is aligned with company goals, past performance, and the environment will initiate a successful new year.
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