Don’t tell me what you value, show me your budget, and I’ll tell you what you value.
That’s what the significance of Budgeting is for any Organization! But Budgeting and forecasting process in any average size Organization takes extensive amount of resources and time of all level of management. So many times executives of the Organization are probed upon how the Organization’s budgeting process adds value to the business activity against its cost of delivery. There is no simple answer to this question, it all depends on the nature of the Organization and how the budgets being prepared, used and monitored. Let us first understand what budgeting is, how budgets are being prepared, what are some of the key benefits of budgets are and how to assess what is wrong in the budgeting process.
What budgeting and forecast is:
Budgeting – process of expressing quantified resource requirements (amount of capital, amount of material, number of people) into time-phased goals and milestones.
Forecasting – is essentially a recasting of the budget. It is a planning tool that helps management in its attempts to cope with the uncertainty of the future, relying mainly on data from the past and present and analysis of trends.
The preparation of annual budget is a first step followed by a forecasts to reflect the changing market conditions, strategic plan alterations, error corrections and revised assumptions as used in the annual approved budget.
Almost all Organizations preparing budgets follow more or less the same following process for the preparation of their annual budgets:
- Establishing the overall goals of the Organization to be incorporated in the detailed budgets of each unit;
- Setting up of annual targets and the level of expenditures compatible with these targets;
- Forecasting future needs, this is generally for a period of 3 to 5 years;
- Establish the assumptions to be used in developing the budgets these includes, inflation index, price and volume increases, exchange rate parity, etc.;
- Translation of Organizations targets and goals to achieve into numbers;
- Address the Organizational issues identified during the monitoring of last year budgets;
- Balance the requirements with resources. Life is all about series of trade-off, you can’t have all your wish list in one go. Priorities need to be set in considering the expected earnings against the expected expenditures;
- Obtaining executives buy in on the numbers.