Budgeting is the process of creating a financial plan for an enterprise that outlines its projected income, expenses, and capital expenditures over a specific period of time, usually a year.
The process typically involves several steps, including:
- Setting Goals and Objectives: The first step in budgeting is to identify the enterprise’s goals and objectives. These can be short-term or long-term, and can relate to revenue, profits, market share, or any other key performance indicator (KPI).
- Estimating Revenues: Once the goals and objectives have been established, the next step is to estimate the revenues that the enterprise expects to earn during the budget period. This can be based on historical data, industry benchmarks, or sales forecasts.
- Projecting Expenses: The next step is to project the expenses that the enterprise will incur during the budget period. This includes both fixed and variable costs, such as rent, salaries, utilities, raw materials, and marketing expenses.
- Allocating Resources: After estimating revenues and projecting expenses, the enterprise needs to allocate its resources effectively to achieve its goals and objectives. This may involve prioritizing certain projects or investments, reducing expenses in certain areas, or reallocating funds from one department to another.
- Creating the Budget: Finally, the enterprise combines all of the above steps into a single document that outlines its budget for the period. This document typically includes revenue projections, expense projections, cash flow projections, and a summary of the enterprise’s financial position at the end of the budget period.
- Monitoring and Adjusting: Once the budget is in place, it is important to monitor actual performance against the budget and adjust the budget as needed. This allows the enterprise to adapt to changing market conditions, unexpected expenses, or other factors that may impact its financial performance.
How much time can that process take in a big company?
The time it takes to complete the budgeting process in a big company can vary depending on a number of factors, including the size and complexity of the organization, the level of detail required in the budget, the number of departments involved, and the tools and systems used to create the budget. In general, the budgeting process can take several weeks to several months to complete in a large company.
The process may involve multiple rounds of review and revision, as different stakeholders provide input and feedback on the budget. Additionally, it may require coordination and communication between different departments and teams, as well as alignment with the company’s overall strategic plan and financial targets. Overall, the budgeting process is a critical part of financial planning and management for any enterprise, and it is important to allocate sufficient time and resources to ensure a thorough and accurate budget is developed.
There are several approaches to enterprise budgeting, and the choice of approach depends on the objectives, size, and complexity of the enterprise. Some of the most common approaches to enterprise budgeting are presented below:
- Incremental Budgeting: This approach involves using the previous year’s budget as a starting point and adjusting it for changes in the upcoming year. The advantage of this approach is that it is straightforward and easy to implement, but it may not be effective in identifying and addressing inefficiencies or changing business needs.
- Zero-based Budgeting: This approach involves starting the budget from scratch each year and justifying every expense. This approach is useful in identifying inefficiencies and cost savings, but it can be time-consuming and resource-intensive.
- Activity-Based Budgeting: This approach involves identifying the activities necessary to achieve business goals and then estimating the costs associated with each activity. This approach helps businesses align their budgets with their strategic objectives and focus on the most critical activities.
- Rolling Budgeting: This approach involves creating a budget for a fixed period, such as a quarter or a year, and then revising it on a regular basis. This approach enables businesses to adjust their budgets based on changing market conditions, business needs, and performance.
- Performance-Based Budgeting: This approach involves linking the budget to specific performance targets, such as revenue or profit. This approach helps businesses focus on achieving their goals and can motivate employees to perform better.
- Cash Flow Budgeting: This approach involves forecasting and managing cash flow, which is essential for maintaining liquidity and ensuring the business’s financial stability.
Budgeting strategies based on organizational structure
Budgeting strategies based on organizational structure are closely related to the different levels of management within an organization. Some of the most common strategies for budgeting based on organizational structure are presented below:
- Top-Down Budgeting: In this approach, senior executives and top-level managers create the budget and then communicate it to lower-level managers and employees. Top-down budgeting is useful when there is a centralized decision-making structure and a high degree of control over the budget.
- Bottom-Up Budgeting: In this approach, lower-level managers and employees provide input and feedback to create the budget. Bottom-up budgeting is useful when there is a decentralized decision-making structure and a need for employee engagement and buy-in.
- Participatory Budgeting: In this approach, managers and employees at all levels of the organization are involved in the budgeting process. Participatory budgeting is useful when there is a need for collaboration and innovation across the organization.
- Functional Budgeting: In this approach, each department or functional area creates its budget based on its specific needs and objectives. Functional budgeting is useful when there are clear departmental goals and a need for flexibility and autonomy.
- Program Budgeting: In this approach, budgets are created based on specific programs or projects within the organization. Program budgeting is useful when there are specific objectives or initiatives that require dedicated resources and funding.
- Zero-Based Budgeting: In this approach, budgets are created from scratch each year based on a review of all expenses and activities. Zero-based budgeting is useful when there is a need for cost control and efficiency.
In SAFe (https://www.scaledagile.com/training/calendar) Participatory Budgeting (PB) is the process that Lean Portfolio Management (LPM) uses to allocate the total portfolio budget to its value streams. VAlue Streams act like programs in standard project management.
Participatory budgeting (PB) is a dynamic, collaborative process that enables LPM to gather the data and build the consensus required to invest in the best possible solutions. It’s a critical element of LPM (lean portfolio Management) and is used to establish Lean value stream budgets.
- PB engages a diverse group of business and technical leaders and other stakeholders in the decision-making necessary to establish and adjust value stream budgets on a regular cadence. Applying PB to establish SAFe Lean budgets has several benefits:
- Allows the portfolio to adjust budgets to support rapidly changing customer and market needs.
- Provides leaders with insights and perspectives from multiple stakeholders about existing solutions and proposed epics
- Creates alignment and buy-in on difficult funding choices, improving employee engagement and morale Increases ownership of budgets and results in more realistic and achievable budgets than those imposed top-down
- Improves information sharing and knowledge between leaders and teams
Discover how KVASAR allows you to work with lean budgets, set objectives and distribute budget along Value Streams in a easy and seamless fashion.