Budget is a short term tool that is a reflection of management’s longer term goals translated into more actionable or operational activities. Typically budgetary cycles are annual. The purpose of a budget is to exercise control and discipline the organizational activities to reach the goals set by the management. A typical budget process is outlined below:
- Budget planning: This is the first phase of a budgetary process where the management sets the agenda for budgeting process. Typically actions are decided and functional heads then start preparing for the information required to construct the budget.
- Environmental scanning: An organization does not work in isolation. External environment impacts the organizations such as regulations, taxes, IT developments etc. The idea behind an environmental scanning is to understand any impacts the external environment might have on the organizational objectives. These impacts are quantified and reflected in the budget. A very current example of external environment impact is new VAT regulations in the UAE.
- Internal scanning: Internal scanning is as important as the external scanning. As the name signifies, internal scanning allows the organizations to see within the organization the areas of weaknesses or inefficiencies that should be improved or opportunities that should be capitalized into.
- Budget construction: Once the external and internal environments have been scanned through, with impacts translated into figures or even qualitative factors, management is now ready to construct the budget that factors not only the external environmental realities that effect the organization but to adjust internally to be aligned with the overall business strategy. Based on the set goals budgets are prepared and there are different ways of constructing a budget some of which are briefly described below:
- Top down: Starting point of budget is sales.
- Bottom up: Starting point for budget is profit
- Zero-based budgeting: As the name signifies, this approach assumes no past or history and a budget is constructed as if the organization just started operating.
- Incremental budgeting: Under this approach, previously made budgets are incrementally adjusted for the new developments to account for changed assumptions.
- Implementation: This is not a step but an ongoing process. Here the constructed budget is acted upon and organizational activities are performed in the way they were budgeted/planned.
- Monitoring and control: This part is as important as the rest of the above discussed steps. A budget which is well constructed, if not monitored and controlled serves as good a purpose as no budget at all. Monitoring and control works hand in hand with the implementation.
Budget for an area of responsibility:
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