Budgeting Principles

There are 24 budgeting principles that every company should follow if they want a budget that is successful and is used by their organization.

Principle #1

Budgeting is easy. But it’s everything else that makes it hard – especially the human factor. Instead of approaching the budgeting process with a complex train of thought, simplify your approach.

Principle #2

Budgeting is all about potential. Company leaders want to know… “What is your potential and how do we reach it?”

Potential revenues? How much product can be made with current resources? How many employees can we afford? What are the potential margins based on costs? How much profit can we retain? How can we grow?

When looking at potential, you also need to be realistic. Is a startup going to be $3 B in revenue in a year? Probably not. But they may make $300,000 or potentially $3 mm.

Principle #3

There is also no right way to prepare a budget. Each organization must find its own process. But there is an easier way to prepare a budget with your own process. We will go further into that later in this execution plan.

Principle #4

Try using the term potential when defining your annual plan. When you ask your employees to assist in defining the firm potential, their natural wariness disappears. Working together as one unit increases the likelihood of success for the four budgets (Operating Budget, Capital Budget, Balance Sheet Budget, and Cash Flow Budget).

Principle #5

The four budgets serve as a control mechanism and provide holistic feedback on results, on the strategy execution, and on manager’s accountability. Use the budgets to your advantage, The budgets can serve to help you understand whether your company is in the correct path or not. If your company is not on the correct path, then use it as a learning opportinity to help restructure your company.

Principle #6

All organizations have a limited amount of money to spend on capital items. Leaders must select which items yield the best return.  “Is this going to pay off in the long run?” Company leaders should spend a sufficient amount of time investigating systematically into which purchases have the potential to yield the best results.

Principle #7

The capital budget is used to hold accountable to only investing in those items that will benefit the firm long term. The phases of the capital budget process include the following:

• Description of the need or opportunity
• Identification of alternatives
• Evaluation of the options and the relevant cash flows of each option
• Selection of best alternative
• Conducting a post-completion audit of the projects

Principle #8

Using a balance sheet budget enables the leaders to control growth, while ensuring cash is available for the growth.  A balance sheet budget is highly useful for measuring whether the projected financial state of a company looks to be in reach. Additionally, it helps figuring out whether a scenario is financially supportable or not. With the help of a balance sheet, you can make the proper adjustments needed to the budget model.

 Principle #9

The cash flow forecast allows accounting to support the plan and add value to the budgeting process. There are several cash flow forecasts that you should use in your business – Daily Cash Flow Forecast and the 13 Week Cash Flow Forecast. These two forecasts allow you to support the plan by knowing where you cash is, when it is needed, and how to best manage it to improve value.

Principle #10

The cash flow forecast is a budget tool that serves the CFO all year. It is helpful to think of the 13-Week Cash Flow Report as giving you the strategic big picture needs, while the Daily Cash Flow Report provides a more tactical level measure of your firm’s cash position. You can tie a week’s worth of cash receipts and cash disbursements as reported in the Daily Cash Report to the 13- Week Cash Flow Report.

Principle #11

A great tool for measuring and controlling a specific or vulnerable area, the micro-budget to instill both focus and accountability. Micro budgets are special purpose, single focus budgets that are used to measure and control one specific area. Some examples include:

• Accounts Receivable,
• Marketing Activities,
• Construction Projects,
• Cost Centers
• Unique Product Lines
• Any Area where the plan is vulnerable

Principle #12

Additionally, many accountants make their firms budget more complex than it needs to be.

In fact, the complexity of your budget can be measured by four factors:

• Operational complexity
• Diversity of products and services
• Size and geography of the organization
• Accountability to others

Principle #13

The complexity of your budget can be measured by controllability. That is to ensure that each line item has accountability.

Don’t assign budget line items to someone who doesn’t have the controllability or accountability to do anything with that line item. Either grant them the authority or don’t assign that person the line item.

Principle #14

Every budget line item needs to be under control of one individual. To ensure accountability, the budget manager must have controllability. The manager needs to have full control over his operations in order to be more efficient and he can do so by properly delegating responsibility.

Principle #15

A budget is controllable by a manager who builds both accountability and ownership. Building accountability and ownership as a manager is crucial, especially when it comes to something as important as budgeting. A budget not only tries to predict a the future of the company, but it is also a goal that the company has set. Any goal or milestone that you set for yourself or the company is more likely to be successful with the proper guidance and leadership.

Principle #16

Allocations do not belong in budgeting. They only lead to disputes and game playing. Do not overcomplicate things as not everyone might agree to those allocations. This can lead to unnecessary arguments.

Principle #17

The budget is designed to measure the quality of key decisions. Every decision made between the time the budget is created to when the time period is up will either get the company closer to their goals or further away. The budget is important because it measures how well the company used their funds.By the end of the time frame, it can show whether the indicated timeframe was successful or not.

Principle #18

All organizations have goals; otherwise, there would be no purpose for their existence. Without goals, it is impossible to establish a budget because there are no targets to aim for.

Some benefits of setting goals include:

• Motivation
• Independence
• Direction
• Meaning
• Enjoyment
• Fulfillment

Principle #19

Budgets require clear and measurable goals. Without budgets, it is very difficult to achieve the business goals because each budget defines targets and measures the progress towards them.

Principle #20

Even when a budget is based on a prior point in time, it still expresses a goal – maintaining status quo. Goals are made beforehand, giving everyone a common goal (such as a budget) can give everyone a sense of purpose in the office and make them see the value in their work.

Principle #21

What prevents people from controlling costs or conserving resources is that they cannot see the direct connection between their job activities and their company’s profits.  If a person has trouble finding their purpose in the workplace, then it might be because they think their job has no impact on bottom line. Employees might think that what they do with their time or resources will not affect the company significantly. Reassure them that whatever their role in the company is important and that their individual success carries a long way with the company’s success.

Principle #22

Part of your job is to help your coworkers and peers see how the work they perform impacts the bottom line. Research has indicated that finding purpose in our job can improve our execution, dedication, and job satisfaction. It also showed that employees ranked purposeful work more important than salary, working conditions, or opportunities for promotion. Be sure to establish a company culture in which everyone sees the value in their work. Reassure your employees that they are there for a reason and that their work is highly influential in the company’s success.

Principle #23

The budget is a mix of many different resources, not just the money for payroll and expenses. A budget includes a vast number of important things such as:

• Planned sales volume
• Revenues
• Resource quantities
• Costs and Expenses
• Assets
• Liabilities
• Cash Flows

Principle #24

Failure to understand and manage all the resources results in wasting these resources. If you do not have a full understanding of the company’s resources, then it would be impossible to put them to their best use. Make sure you have a thorough knowledge of the resources in order to use them more efficiently.