30 January 2024
Mastering the budgeting process
Budgeting and forecasting is a complicated process and can often go ignored until it’s too late. This blog lays out everything you need to know about the budgeting process.
In this blog we’ll cover:
- What a budgeting process is and why it’s so vital
- Seven key steps to create your own budgets
- Best practice to ensure you avoid the most common pitfalls
- How technology can aid in budgeting and forecasting
- Tips and strategies to make your planning and budgeting as effective as possible
- Advanced tips to enhance your budget making knowledge
Understanding the Budgeting Process
What actually is the definition of a budgeting process? It might seem simple, but the concept is pretty involved. It’s not just writing out a budget and hoping it works. It also involves taking a look at previous budgeting, forecasting revenue for the future and figuring out the organisation’s costs.
The importance of a budgeting process can’t be overstated. At the most basic level, without money, your business is dead in the water. Cash flow management is critical. However, the benefits of budgeting and forecasting go beyond simply surviving, as they can also help you thrive.
- Helps set and report on goals
- Helps prioritise projects based on potential return on investment
- Makes investors more confident in your organisation
- Build resilience against financial emergencies
What are the 7 steps in the budget process?
- Review your previous budget
- Understand your income
- Budget for fixed costs
- Consider more variable expenses
- Assign some short-term and long-term goals
- Communicate clearly
- Refine the process
While the nuances might change depending on your needs, following this framework will help you create a consistent approach that makes budget controlling much easier.
But what are the steps in a budget process? Let’s dig into the details.
In detail:
Review your previous budget: What did your budget look like last year? Was it followed? Did anything unexpected happen? Evaluate how things went and what could be improved. Doing this will make budget forecasting a lot easier, as you’ll have a frame of reference to work from.
Understanding your income: This will involve some budget forecasting, as you’ll need to predict (in an informed way!) how much income you’ll have for the upcoming period. What are you income streams, and how much would you expect from each one? If you have financing (such as venture capital), consider how much of this you’re willing to use.
Budget for fixed costs: While you can’t account for every expense, you can factor in your fixed costs. These are also known as overheads, and you’ll seldom have much control over them. They’re not impacted by how well the business is doing.
Consider more variable expenses: These are costs that can be adjusted, often at fairly short notice. Consider your upper limits for these expenses, and what they can be safely lowered to. Marketing budgets, team perks, and travel expenses all fall under this umbrella.
Assign some short-term and long-term goals
Where do you want to be at the end of this budgeting period? What about a few years after that? Your budget may account for the immediate future, but does it set you up for long-term success?
This should align with your business goals, so you should involve stakeholders from around the business. You should also consider a ‘rainy day fun’.
Communicate clearly
Once you have your budget in hand, you need to communicate it to the rest of the team. Messaging is critical, as without it you’ll leave people feeling confused and uncertain.
Do people know how much they have to spend? Are there any KPIs attached? Without this, your budget isn’t going to be useful, as no one will know how to follow it.
Refine the process
You can’t create a budget and then leave it. You should regularly return to it and see if it needs to be adjusted or refined. For example, if you come into more funds than you’d expect, you’ll need to figure out what you want to do with it.
At every stage of this budgeting process, you should consider budget forecasting. Budgeting and forecasting are closely entwined. Forecasting isn’t predicting the future; it’s giving a reasonable ‘best guess’ based on data as well as any historical precedent. With adequate budget forecasting, you’ll be able to build out a more informed budget.
Budgeting Best Practices for Businesses
There are two strands to ensuring your budget making follows two strands. Firstly, there are effective techniques you can follow. Secondly, there are common pitfalls that you need to avoid.
Common pitfalls
Not thinking strategically
You might have an urge to spend money as soon as it comes in, but this is precisely what your budget should avoid. You need to consider the long term, as well as any ongoing costs, or else you could be in a lot of trouble.
Underestimating costs
People tend to be good at considering the big ongoing costs such as wages or rent, but smaller costs quickly add up and can often pass without notice. That’s things like heating bills, stationary, even your phone line. While you should overload your budget with every single thing, you’ll need to factor these in.
Emergency manoeuvres
No budget is foolproof, and no prediction is ever guaranteed. You need to have a plan that accounts for any sudden changes. For example, if you’re an agency and you’re reliant on one big client, what do you do if they fire you?
Effective budgeting techniques
Incremental budgeting
This is the most straightforward technique. You simply have to use last year’s figures, increase them by a certain percentage, and use this to create this year’s figures. While it’s pretty simple and easy to communicate to the wider business, it’s not very accurate. It also only works if you have historic figures.
Zero based budgeting method
At the start of each year, you set each budget to zero, and then have each manager justify every expense as if it’s the first time it’s being considered. This helps slash budgets down, excellent if you’re operating in a fine margin. However, it can be quite time consuming.
Value proposition budgeting
Similar to the above, value proposition budgeting is about justifying each expense and establishing what value is created. However, instead of solely cutting costs, value propositions are built around reaching a certain goal. This makes it a lot less strict, but it can be hard to establish what is truly valuable.
The Role of Technology in Budgeting
According to the CFO, the average finance employee spends around 75% of their time gathering data, which reduces the time spent actually analysing that data. This is made worse when they use paper based solutions, or even things like excel. Software can have a huge influence on planning and budgeting processes. There are numerous options to choose from and there are loads of benefits of using technology in the budgeting process to consider, including:
- Cloud-based technology: Update your budget from anywhere, without worrying about version control or compatibility issues
- Data visualisation tools: Present and explain your findings in a clear format that can be understood by many stakeholders
- Collaborative platform: These ensure you can organise your budgeting and forecasting documents in a way that other team members can access
Take it further: Advanced Topics in Budgeting
Did you know that budgets can be used as a key metric to measure success? For example, you can compare the predicted cost of a task versus the actual cost. Was it better, or worse? Are you able to explain why? Can this be repeated? This gives management the tools they need to adjust production, communicate those changes to the rest of the business.
Want to find out more about how to take your planning and budgeting to new heights? Take a look at how our finance offerings can drive digital transformation and aid your budget making.
