What Is Budget Management? (With Helpful TIps for Managers)
Updated September 30, 2022
Managing a company department often involves tracking how the department generates revenue, uses resources, and achieves planned goals. If you're looking to get a new managerial role, consider exploring strategies to effectively manage a department and its budget. Learning about budgeting for managers and reviewing helpful tips can equip you to learn the necessary skills and information to excel in your role. In this article, we explain what budget management is, discuss why it's important for managers, outline strategies for it, and present budgeting tips for managers.
What is budget management?
Budget management is the practice of managing and tracking income and expenses. Companies often have an overall budget for all operations and separate budgets for each department or team. Departmental managers are in charge of managing and overseeing their department's budget. A budget is a financial plan that lists all planned expenses and revenue. It typically consists of four significant aspects:
Budget for employees: This entails reviewing the salaries and benefits of employees in the department and determining if there's a need for recruits. This budget covers all costs associated with hiring new employees and retaining existing ones.
Budget for capital expenses: This includes costs such as getting a new office building or purchasing new equipment, furniture, or computers for the company. Organizations consider these expenses an investment for growth as the purchased items typically last for years.
Budget for operating expenses: This budget entails all the costs associated with running the daily operations of a department. The department manager usually predicts the cost of expenses like rent, utility bills, and maintenance costs and creates a budget for it.
Budget for revenue: This is a budget of the income from sales, investments, and other company sources. The manager records the data of all income received in the budget.
Why is budgeting important for managers?
Managing a company's budget effectively is crucial to the success of a business. The company's budget ensures that it has the required resources to achieve its short-term and long-term goals. Managers need excellent budgeting skills to succeed and contribute to the company's success. Here are other essential reasons budgeting is important for managers:
provides an insight into the company's financial health
enables managers to compare predicted budget to actual results
helps managers make informed decisions about departmental issues since they know how much they allocate for each aspect
helps unite the team on the company's goals and objectives
indicates underperforming or unprofitable areas in the department
allows managers to recognize profitable aspects that meet defined goals consistently
helps set pre-determined standards managers can use to evaluate the company and its performance
Budget management strategies
Here are a few strategies you can apply to manage your budgets more effectively:
Follow a bottom-up budgeting approach
In this approach, the company executives plan and estimate the company's financial needs and communicate the information to all teams and departments. Then, the department managers and supervisors can plan how to manage the operating costs and expected revenue and sales in each department. After planning and deliberating, the managers of each department can convey the proposed departmental budget to higher company management.
Follow a top-down budgeting approach
Many organizations apply a top-down approach to managing budgets. In this method, the company's higher executives prepare the company's financial estimates and set financial goals according to the predicted forecasts. The executives communicate the financial estimates and goals to the mid-level management. Then, the managers and supervisors in the mid-level roles plan and set departmental budgets before speaking with the lower-level management. The lower-level managers in operational teams receive the budget and adjust their operations accordingly without planning a budget or reporting to higher company management.
Track financial and operational budgets
Most department managers monitor and track both financial and operational departmental budgets to form the basis of the balance sheets. Managers use a financial budget to plan how to allocate funds and assets, and track the department's expenses and liabilities. In contrast, the operational budget is helpful for planning and visualizing future income or revenue. This strategy helps to accurately monitor both aspects of a departmental budget for effective management.
8 budgeting tips for managers
If you're in a management role, consider the following helpful tips to help manage your department's budget effectively:
1. Follow the established budgeting process
If you're new at the role, consider understanding the established budgeting approach and referring to it. Before preparing your budget, you can study the organization's budgeting practices, procedures, and timelines. For instance, if the company uses a bottom-up budgeting approach, you're likely to collaborate with higher management to understand the executive goals and prepare an effective departmental budget aligning with the set goals.
Similarly, if the company uses a top-down approach, it's more likely to receive a pre-defined departmental budget from company management. You can then communicate with your department's employees on how to effectively manage the department's resources and allocate funds appropriately according to the budget. Understanding the established process and following it can save you a lot of stress and help you manage the budget successfully.
2. Participate in budgetary management training
Many new managers choose to participate in budgetary management training courses or workshops to increase their knowledge about managing budgets. Consider participating in the training, especially if you're new at your role, as it can help develop your understanding of different aspects of a financial and operational budget. You can learn how to effectively track your department's earnings, expenses, and contributions to the company from these pieces of training.
3. Understand the organization's goals
It's essential to understand an organization's goals to create an effective company budget. You can communicate with company management to understand the short-term and long-term goals they expect you to reach each budgeting period. This information can help you accurately plan for your department and team's needs for that budgeting period. It can also help you identify additional resources you may need to meet the company's objectives or complete a project.
4. Collaborate with your team
Consider collaborating with your team when setting yearly, quarterly, or monthly budgets and get feedback from them. This can help you understand the unique needs of the department and its employees and plan resources wisely to improve the overall team's productivity. Involving your team can make them feel more engaged and encourage them to identify creative ways to manage the department's expenses. Employees providing their insights and suggestions to the budgeting process can also help them can also enhance the understanding of their roles in achieving company goals and motivate them to perform better at work.
5. Use financial information
You can reference the organization's existing financial data to aid your decision-making process and set your priorities right when preparing a budget. Consider evaluating your financial statements, such as the balance sheets, income statements, and statement of cash flows to assess the organization's status and identify areas to improve. Using previous financial information available can also help you allocate departmental resources suitably.
6. Consider monthly budget evaluations
While many managers track their departmental budgets quarterly or yearly, you can consider setting monthly budget evaluations. Monitoring your monthly budgetary operations helps to ensure better accuracy and ascertain that the department's procedures stay within budget. Evaluating budgets within a shorter time frame can provide more precise insight into the management of the department's finances and resources. Tracking monthly budgets can also help you identify aspects in the department where you can allocate more resources to improve its processes or eliminates areas that require unnecessary costs without contributing to the company's goals.
7. Communicate progress and track results
Maintaining effective and consistent communication is important when managing a budget. You can have regular meetings with relevant stakeholders and company management to report your department's budgeting efforts and results. Consider using data visualization tools to effectively illustrate your team's progress and make it easier to communicate budgeting updates. You can also highlight any recent accomplishments or areas of improvement in your department in the reports to show company management your department's efforts to contribute to the company's goals.
8. Learn financial management
Financial management is an essential aspect of managing a business or department's budget. Consider engaging in continuous education to improve your financial skills and knowledge. Acquiring more knowledge in this field can aid your professional development and help you advance in your career. You can advance your educational qualifications by studying for a Master's in Business Administration (MBA) program or taking online finance courses. This can help broaden your understanding of essential financial terms and concepts, and enable you to identify strategic ways to add value when preparing your departmental budget.
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