Budgeting within an organization is similar to budgeting for a single individual or family in terms of the overall process. It is a key tool for keeping a company accountable for everything it does, with budgetary controls being critical to overall management of the business. Proper budgeting in a business is more complex than personal budgeting since many people are involved in the budget process, but it breaks down into six basic phases.
Organizational budgeting starts with outlining exactly what the company wants to do. For instance, the company could decide it wants to increase productivity by a certain percentage or make better health care coverage available to employees. Establishing the goals clarifies the vision managers have for the company. This allows the managers to develop clear key performance standards, or methods of measurement, by which to track and analyze progress toward those goals.
Once a company knows what it wants to do, the company looks at its financial records and figures out how much money is already available for use. Examples of assets a company might have on hand include bonds, checking account funds and equipment it intends to sell. In some cases, companies need appraisers to verify the worth of individual assets.
Income Projection Assessment
To get a complete picture of the company's spending power and a concept of the money the company can spend at different points of time, the company needs to add its projected income to the available assets. During this step, managers also need to assess exactly when the projected income will be available for use.
Meeting a company goal almost always has a price tag. For example, if a company wants to produce 10 percent more of a product, it has to buy more supplies. The fourth stage of budgeting is analyzing the expenses associated with each goal the company has set.
The final phase of budgeting in an organization is often hardest. It involves analyzing the budget critically, making cuts where necessary and rethinking how to approach the goals. People often disagree about what to cut or the best way to get results. During this stage, managers look at individual budget plans from each department and send the budgets back with suggestions for improvement. For instance, they might tell a department head he needs to cut an additional 5 percent from his proposed budget in order to get approval. Even though this is a tough step to get through, it is the step where the innovators and risk takers often shine, coming up with creative ways to meet budget stipulations and company goals.
Submission and Approval
Once leaders have a basic budget in place, they move to the final stage of organizational budgeting, submitting the budget for final approval by the company's board of directors. Submitting the budget does not guarantee approval, but if managers are in tune with the board, this often is merely a formality. If the board does not approve the budget, managers have to keep negotiating with their department heads and trying to make cuts, resubmitting the budget until the board says it is okay.
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