Effective and efficient budget management is the cornerstone of a successful business operation. It is close to personal financial management but more complicated due to the size, structure, and short and long-term objectives. It requires planning, commitment, and discipline to plan. It consists of planning and implementation that provides the standard for the effective use of financial resources for business operations.
This article will highlight the steps to creating realistic and effective budgets for new and existing departments, how to make sure that budgets are being followed, and how to cultivate a more effective budget management process.
First Step to Budget Management: Planning
Budget management starts with planning an operating budget. Planning is key to the budgeting process, drawn from the short and long-term objectives of the company. The plan must be aligned with the objectives, goals and visions of the business, as well as the overall business strategy. These should be your standards when planning the overall budget. By being focused on the strategic plan and objectives, your department will not be led astray by unnecessary expenditures on items or elements not in line with the business strategy and objective.
- If you are setting up a new department, planning a departmental budget is one of the initial steps of the set up. The plan must be in line with the objectives or goals you want to achieve within the department as well as within the organization as a whole. For example, you are setting up an IT department to facilitate the IT needs of other departments and centralize the gathering and distribution of information throughout the enterprise. Budgeting is putting in the financial resources needed to achieve the objective and goals of the set up and operation.
- For an already existing department, your job as a manager, is to ensure the existing budget meets the objective and goal of the department. Look into the existing or baseline budget if the financial resources allocated to your department are used effectively. Use this as an outline for your planning for your budget forecast. Look into the resource usage, if these are sufficient or deficient in the existing operations to meet the business needs.
Aside from this, here are key items in budget planning that you have to consider; estimated, fixed and variable cost in operations, as well as the cost of implementing a goal and emergency funds.
- Fixed costs are expenses that do not change, such as employees’ salaries, rentals and insurance. These do not change and need to be funded. If you are planning to increase the number of employees in the department, the cost of hiring and salary of the employees should already be estimated and included in the budget.
- Variable costs are the estimated expenses that vary from month to month, such as overtime pay and software subscriptions. These should be controlled and within the allotted budget. An example of this is quarterly or bi-annual checking and maintenance of hardware, which means overtime for IT personnel to cover more grounds at the least possible downtime for other departments.
- Cost of goal implementation is the estimated expenses related to executing the initiatives to meet a certain goal. Examples are upgrades in solutions or hardware to cope with the demands of the department in facilitating the needs of other departments.
- Emergency fund is a resource for the unforeseen expenditure that needs to be addressed right away.
Make Monthly Reviews for Efficient Budget Management
After the Budget planning and approval by the business owner(s) or board, the next step in the budgeting process is the implementation of the budget. When the budget is implemented, monthly reviews are executed to verify the actual expenditures are in conformity to estimated amounts, and take the necessary steps to decrease the variance between the estimated and actual costs.
Monthly reviews on the budget plan against the actual expenditure gives you the opportunity to tweak and prevents incurring unnecessary expenses and mistakes that are detrimental to saving and achieving objectives while you are operating in the fiscal year. Reviewing the budget is a cost efficiency effort to increase savings by preventing nonessential items from creeping into expenditures.
Implement Cost Saving Process for Efficient Budget Management
In line with implementing a monthly review, analyze the different areas of operations in the department wherein you can save, as well as increase the efficiency of the business process. Here are some areas in which you can implement a cost-saving process to decrease expenditures and increase department efficiency:
- Study your supply expenditures and look for suppliers that can meet your price demand. Sometimes it’s a matter of looking for better vendors to meet your demands both in supply quality and price.
- Track the efficiency in operations and in achieving goals by setting up performance measurements. When you’re tracking and measuring the effectiveness of operation and goal achievement, you are proactively ensuring that your execution meets the strategic plan including the budget. It enables you to make the necessary adjustments within the period of operation. Cost efficiency equals savings.
- Look into subcontracting part of your business operations to meet more of the demands of the department. Subcontracting sections of business ops lowers costs while meeting the objectives for that period.
Efficient budget management requires planning, considering all key elements of operation, in line with strategic planning to meet objectives and goals and unforeseen events. Having an effective way to manage budgets goes a long way, and discipline plays a big role in the budgeting process and implementation to ensure the effectiveness and cost savings.
A Proactive Budget Management Process
There shouldn’t be any surprises when your team needs to execute on a project – everyone in your organization should have the ability to make smart financial decisions that benefit the company, and this starts with having visibility to budgets.
Having real-time data to what has been spent and what is left of the budget will allow department heads and employees the ability to cultivate better Spend Cultures in their organizations, as they will now be more aware of what projects are financially viable and think twice before making purchases on behalf of the company.