Budgetingby John Kind
- What is budgeting?
- Why is budgeting important?
- Why do I need to forecast the results for the current period?
- What’s the link between my budget and the organisation’s wider objectives?
1. What is budgeting?
A budget is a short-term plan, typically for a 12-month period. If the budget is for a business or organisation, it can be broken down into budgets for each organisational unit, such as a department, function, section, project or team. The financial aspects of a budget tend to receive particular attention, but the ‘non-financial’ aspects are also important. ‘Non-financial’ aspects include customer satisfaction levels, market share objectives, staff retention rates and health, safety and environmental targets.
A budget is, therefore, a formal, short-term commitment to achieve an agreed set of financial and non-financial results. In the case of a 12-month budget, it may be divided into shorter intervals, such as a calendar month or four-week period, to allow, for example, for seasonal fluctuations.
2. Why is budgeting important?
Budgeting is important for four reasons:
- To ensure that a business or organisation is managed in a systematic way
- To coordinate different activities within an organisation so, for example, you have sufficient warehouse space to stock a new product and a transport fleet to distribute it to customers
- To communicate objectives – staff are much more likely to be effective and well motivated if they know what is expected of them
- To measure and assess performance during a financial period. This will help to ensure that the budgeted objectives are achieved, with corrective action being taken, if necessary.
3. Why do I need to forecast the results for the current period?
A forecast should be done before you start preparing the budget for the following year – the next budget period. It is essential to forecast the current period’s results. Otherwise, you will have no foundation or platform for thinking about the next budget period. In effect, your forecast of the current period is the basis on which the budgeting challenges for the next budget period, next year, can start to be identified, discussed and resolved.
4. What’s the link between my budget and the organisation’s wider objectives?
The next year’s budget should have clear links with your organisation’s longer-term strategic plan. You need to indicate, as specifically as possible, the steps you will take next year to help the organisation achieve these longer-term objectives. You should therefore pinpoint the major internal issues that need to be addressed in the next year’s budget, matters which will help the organisation to achieve the longer-term objectives in the strategic plan. These might include launching new products, additional recruitment or upgrades to the IT system, for example.