The budgeting process is very involved as it is the result of plans, forecasts and predictions. Thus, it serves as a basis for all future activity and targets, and is an intrinsic part in determining the direction and activities of every employee, department, and line of business.
While the process varies from company to company, in its minuta, the general budgeting cycle is as follows:
- Top-down, bottom-up, companies must first decide if the flow of information will be determined by senior management and the company’s goals, or whether individual departments determine their own goals.
- Determine KPIs, whether it’s product-line, geographic, or by function.
- Gathering historical and financial information from all departments, systems, functions and LoBs. This includes:
a. Performance data: sales, customer, regional, and product
b. Expense data: direct, indirect, fixed and variable costs
c.Operational data: HR, IT
- Projections and forecasts: using historical performance, expense and operational data, companies can create incremental budgets or start from scratch, analyzing all needs and costs, by creating a zero-based budget. Some use a combination of both, employing a hybrid approach to create their budgets. Economic shifts, competitor information and industry trends are also considered in this critical phase. From this, companies can create their break even point, a task which is much easier to perform with an automated solution and a unified data source.
When budget managers effectively evaluate their performance on an ongoing basis, they can improve the allocation of resources, objective setting and, of course, results.