5 Core Steps in Budgeting
- Establish the assumption for the budget
- Design the budget template
- Review budget
- Finalizing the budget
- Budget Tracking and reporting
1. Establish the assumption for the budget
A lot of companies wasted time and resources on the first cut of the budget because the departments do not know where the company was heading. This was because no assumption was given to them to prepare the budget.
Without assumption, most departments will simply prepare the budget based on their own assumed activities. For example, marketing may run a campaign to increase sales but the sales team does not include the increase in projected sales for the marketing activities. The supply chain did not factor in the increase in warehousing cost. Hence, it is important to establish the assumption so that the departments have a better understanding of the revenue and cost expected for the following year.
2. Designing the budget template
Budgeting is a skill and learning how to budget with accuracy takes practice. Having the right template will help shorten the time taken to learn how to budget with accuracy. In this phase, we will create a template to help the department heads get started on how to budget with accuracy.
3. Review budget
The initial review of the budget gives the management team a good overview of the profitability of the company in the next year. In most cases, the Sales department will underestimate the revenue while the other departments will overestimate the cost, hoping that the increase or cut is less than what they really have in mind. A good review will make sure that the company could establish a budget that is reasonable to achieve in the following year.
The initial review would equip the management with plans to respond to changes in the business environment, i.e worst case and best case scenarios without having to enter into fire-fighting mode.
Subsequent review(s) of the budget is for fine-tuning the numbers for the likely scenario, worst-case and best-case scenarios.
4. Finalizing the budget
A final review should be on approving the budget for next year. The budget numbers are then frozen for execution and tracking. Unless there are major changes in the business environment, like the COVID-19 pandemic, the budget numbers should form the basis for tracking for the whole year.
5. Budget Tracking and reporting
Budget tracking and reporting is the final steps of budgeting. In this phase, departments will have to compare the actual against the budget and explain the variance for the month and YTD. In this ongoing phase, departments will be reminded to stick to their budgets which were created based on a coordinated effort before the year started. It is also a time where they learn what has gone wrong with their budgeting and improve on the accuracy of their budgets in future.
To have a productive budgeting exercise, a good setup for the budgeting template and learning how to consolidate efficiently is important. Using Excel and Power Query will shorten the process of consolidation and ensure that nothing is missed out during consolidation.
If you would like to know how to do it effectively, check out our “Grow Your Profits through Data Analytics and Data Modelling” course. It is the best way to consolidate the budget easily with zero budget