Creating a budget is not just an exercise that the CFO gives to the managers of the company to provide busy work to those already very busy. A budget is a comprehensive financial plan for achieving the financial and operational goals of an organization. Used correctly, a budget is the map of the company’s strategic plan. In creating the budget, the company is developing its objectives for the acquisition and use of its resources. Once in place, it becomes a valuable benchmark to determine how well the steps taken by management are ensuring objectives are attained.
There are many benefits derived from budgeting. It formalizes the coordination of activities between departments while aligning these activities to the big picture – the company’s strategic plan. It provides the assignment of decision-making responsibilities and enhances management’s responsibility. With a solid plan in place, all decision makers are working towards the same goal. In addition, the budget improves performance evaluations – providing a common base for discussion on how well the manager met his goals and providing a talking point concerning why actual results veered from the original budget. It encourages all areas within the business to become more efficient, which rolls up to a greater efficiency company-wide.
Creating an effective budget can be a daunting task. It is more than crunching a bunch of numbers and throwing it out to the team. Participation in the budgeting process is an important part of the employee-management communication process. It leads to group acceptance of the budgeted goals. Budgets must be perceived to be fair and reasonable by employees whose performance will be compared to these goals. The process of creating the budget with the team is an opportunity to hear the team’s opinions and ideas and to share the organization’s vision with them. Involve them and get their buy-in, and it will lead to greater success.
In addition, technology can be crucial when creating and managing a budget. With today’s availability of cloud computing and instant communication, it is even easier to develop and manage the company’s budget. Using a system that enables the use of dimensions and containers to slice and dice the data allows budget development by division, department, or even by employee. Once established, all expenses can automatically be associated with the appropriate area, giving access to real-time actual data to compare to the budgets. Quicker analysis allows a more effective use of the budget. Issues can be identified earlier allowing for quicker resolution.
Here are a few ways a more effective budget can be created.
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