What Are Budgeting Processes? (Steps and Tips to Improve)

By Indeed Editorial Team

Published June 25, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

A budgeting process can affect the overall success of an organization because it helps in regulating cash flows and anticipating business expenses. The organization's expenses and revenue determine if it's performing well and has the required funds to scale and grow. Whether you're operating your own business or helping an organization manage its finances, creating a budget can help support its growth and achieve scaling of business operations. In this article, we answer “What are budgeting processes?”, explore its importance, learn the steps to create a budget, and review the tips for improving the budgeting process.

What are budgeting processes?

Knowing the answer to “What are budgeting processes?” can help ensure you create budgets that help an organization stay profitable. Budgeting is the monetary action plan that allows an organization to allocate resources to help ensure continuous profit generation. The budgeting process is a financial planning process that helps an organization plan and prepares its finances for a set period. This process entails reviewing past budgets, identifying and forecasting revenues, and assigning the amount to spend on a particular project.

An organization might create a budgeting process to record how much they earn and spend over a certain period. This process can help companies anticipate the risk associated with their income streams and address the issues early. Usually, the budgeting process requires the finance team, budget managers, and senior management inputs.

Why is a budgeting process important?

A budgeting process is important because of the following reasons:

  • Sets clear targets and expectations: Setting your budget helps set targets for costs and revenue. This helps other departments achieve their organizational goals within the budget.

  • Helps in receiving funds: When an organization seeks funding from venture capitalists and investors, they want to know how the organization spends money. Creating budgets can help an investor understand how much money the organization expects to bring in and its expenses.

  • Meets financial goals: A budget helps an organization understand how it's performing. Creating a budgeting process can help meet goals because the organization is aware of the money it uses and spends.

  • Prepares for emergencies: It can help you handle unexpected financial problems. Often, a robust budgeting process keeps aside some money in the event of an emergency so that you don't reduce funds from some other parts of the business operations.

Related: What Is a Budget Constraint and How Do You Use the Equation?

How to create a budget

Here are eight important steps in the budgeting process:

1. Identify the organizational goals

The first step of the budgeting process is identifying the organizational goals and determining how to achieve them. When setting goals, it's essential for a business to consider the sales trend, socio-economic surroundings, and economic resources available. By understanding the organizational goals, you can prepare a budget. For instance, an organization might want to control its expenses during the budgeting process.

Related: Process Goal vs. Outcome Goal (And How to Set Goals)

2. Choose between a top-down and bottom-up budgeting process

After identifying the organizational goals, focus on either a top-down or bottom-up budgeting process. The top-down budgeting process is a budgeting method where senior executives and management prepare the budget based on the organizational goals. Past performances and current market conditions significantly affect the budgeting process. Lower-level management plays a vital role in implementing and executing financial goals. After creating the budget, the management makes a budget allocation for different departments. These departments create their budgets based on the department's goals and fund allocations.

In the bottom-up budgeting process, the department prepares a budget for their teams based on what resources they need for the upcoming year. They create a budget based on the outline they receive from the upper management. With a bottom-up budgeting process, team members feel that they're an integral part of the decision-making process. Before implementing a budget, the department presents its budget for approval.

Related: What Type of Budget Should I Use? (With Descriptions)

3. Secure funding

The next crucial step in the budgeting process is securing funding for the organization. Securing funding is essential because it establishes the amount of capital expenditure to which an organization has access. Capital expenditure help in buying the physical assets required to improve the employees' productivity. For example, in a budget, the organization might allocate funds to maintain capital expenditures, extend the lifecycle of current products, or fix a vehicle.

Related: How Startup Funding Works (With Definition and Stages)

4. Know the organizational priorities

How many funds an organization allocates to each department depends on what it wants to achieve. For instance, if it plans to gain new clients, it's essential to increase the sales budget to help the sales department reach new clients and pitch presentations to them. Interestingly, allocating budgets to research and development might help in understanding that customers prefer high-quality products. Based on the research, the organization might decide to improve the quality of the current products.

5. Prepare revenue and expenditure budgets

Next, prepare subsidiary budgets for each department. Preparing proper and realistic forecasts for budgets like cash, purchase, sales, labour, overheads, and production, and expenses, such as general and administrative expenses, is the key to creating accurate budgets. Having a realistic forecast of the subsidiary budgets can help an organization prepare its budget. Similarly, it's essential to plan for the expenditures as the organization cannot spend more than what it earns.

Related: What Is Revenue? (With Definition, Types, and Examples)

6. Incorporate bonuses in the budget

Based on the financial result, an organization might often declare bonuses for the employees at the end of the financial year. Often, in case of exceptional performance, it might declare bonuses mid-year. For a smaller organization, this number might be significant, but for large organizations, this expense can significantly affect the finances. Having a provision in the budget for such unplanned bonuses is essential for creating budgets.

Related: 12 Different Types of Bonuses (Definition and How They Work)

7. Get the budget approved and implement it

The next step is getting the budget approved by the senior management. If the senior management feels the budget is correct, they typically approve it. Otherwise, they might suggest some changes to incorporate. After receiving the management's approval, each department implements the budget.

8. Focus on budgetary control

Budget implementation isn't the last step in the budgeting process. Comparing actual performance with the provision and budget estimate can help managers improve their budgeting process. It's essential to set up budgetary controls to make corrective actions in future budgets.

Related: What Is Management Reserve for Project Budgets? (And How-To)

Tips for improving the budgeting process

Use these tips to enhance the quality of the budgeting process and improve the cash flow and return on investment:

Perform a SWOT analysis

One leading way to improve the budgeting process is by performing the SWOT (strengths, weaknesses, opportunities, and threats) analysis to evaluate the current status of the budget. Use the SWOT analysis to understand ways to improve and expand the organization's budget. For instance, securing funding might be a strength. A weakness can be an organization still needing funds to complete its operations. The competition might be a threat, and the ability to increase the client base or scale operations can be an opportunity.

Related: SWOT Analysis Example, Steps, and Importance at Work

Remain flexible

Being flexible helps an organization account for market changes. When an organization adapts to market changes, a manager can make thoughtful decisions on the budget. It helps them ensure that the budget fits the organizational requirements and needs. Also, focus on reviewing the market to see if the budget warrants any changes and incorporate those changes for improved results.

Related: What Are Flexible Work Arrangements? (Pros and Cons)

Hire qualified employees in the accounting department

Focus on hiring qualified employees in the accounting department. These professionals can help manage complexities related to the budget, such as ledgers, expenses, and transactions. Qualified candidates can use their expertise to decrease costs and streamline business growth.

Use an accounting software

Investing in accounting software can help reduce errors in an organization's budget plan. These resources can help track expenses and income, create profit-and-loss statements, and make intelligent decisions. These tools can identify problem areas and help manage the organization's taxes and expenses.

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