Organization of a budget
Every organization, including the family, needs a budget. Therefore, developing and managing a budget is how successful businesses and families allocate, track and plan spending, including tax spending.
A formal budget process is the foundation of good management of both family and business income for growth and development.
Much like personal finance, discipline and planning should be the cornerstone of a business budget process.
In this sense most aspects that come with managing an organization, the budget should be driven by the vision, that is what you are trying to achieve and the strategic plan, which relates to the set of steps to reach the goal.
Organizations that stay focused on their strategy and plan know exactly what they want to spend their resources on and have a plan to help prevent money from being spent on areas that do not align with the vision, i.e. what is being tried to do and the mission, which relates to the reasons why things are being done.
Below are some steps for organizing and managing the budget.
Clarify the Strategic Plan
Every organization, regardless of its size, should know the reason for the budget and the goal it hopes to achieve. This is articulated through a written Vision and Mission Statement. A Strategic Plan is the organization’s method of achieving its mission.
The first step in the budgeting process is to have a written strategic plan. This ensures that the organization’s resources are used to support the strategy and development of the organization. This means budgeting towards the vision.
Determine the goals and objectives of the eCompany
Annual business or family objectives are the steps an organization takes to implement its strategic plan and it is these objectives that must be funded by the budget.
Goals must be developed and there must be accountability for achieving them. This is typically the responsibility of the management team, the board of directors, the business owner, or the productive members of a family. The budget provides the financial resources to achieve the goals.
For example, if the organization has exceeded the capacity of its facilities and there is a goal to increase space, revenues must be budgeted to expand or relocate the business operations.
Clarify the scope of revenue
Revenue projections should be based on historical financial results as well as growth revenue projections. Therefore, projected growth may be linked to organizational or family goals, as well as planned initiatives that initiate business growth.
For example, if there is a goal to increase sales by a certain percentage, those sales projections should be part of the revenue projections for the year.
Making Fixed Cost Projections
Projecting fixed costs is simply a matter of looking at predictable monthly costs that do not change. Employee compensation costs, facilities expenses, utility costs, mortgage or rent payments, insurance costs, contingencies, and other costs.
Fixed costs do not change and are a minimum expense that must be funded in the budget. For example, if there are vacant staff positions, the cost of filling those positions should be part of the fixed cost projections. Similarly, these fixed costs are projected if it is a family budget.
Determining variable costs
Variable costs are costs that change from month to month, supply costs, overtime costs, among others. It refers to expenses that can and should be anticipated and controlled.
For example, if increased sales at Christmas cause overtime costs to temporarily increase, those costs should be budgeted.
Specify the annual spending goal
The objectives related to the projects must also be budgeted for. Each initiative should have projected costs linked to the objectives. In this case, the cost of implementing the goals is incorporated into the annual budget.
The cost projections must be identified, established and incorporated into the budget of the department responsible for setting the objective.
For example, if the sales department aims to increase sales by a certain percentage, the costs associated with increasing sales for additional marketing materials, travel, entertainment, should be incorporated into this budget.
Determine the amount profit-making
Every organization, whether for-profit or not, and also family, should have a specific profit margin. Profit margins provide advantages for the business owner or investors.
Non-profit organizations use their profit margins to reinvest in the facilities and development of the organization. Profits are important to all organizations and healthy profit margins are a strong indicator of an organization’s strength. The same is true for the core family where profits should be used to reinvest in growth and improve quality of life.
The appointment of the Board in charge of the budget should be made.
In the case of the company, a board of directors, the president, the owner or the head of the organization, must be appointed to approve the budget and keep up with its execution. Again, similar to personal finance, the owner must review the monthly financial statements for the following reasons. To monitor budget performance, be familiar with all expenditures, and to safeguard the organization against misappropriation of funds and possible employee fraud.
Execute the budget review
The budget review committee should meet monthly to monitor performance against objectives. This committee should examine budget variances and evaluate issues related to budget overruns. It is important to do this on a monthly basis so that there can be a correction of overspending or a modification of the budget if necessary.
Waiting until the end of the year to make corrections could have a negative effect on the final outcome of the budget.
Processing budget variances
Variations in the budget should be discussed with the head of the department responsible and questions should be asked about the cause of the variation.
Sometimes unforeseen situations arise that cannot be avoided, so it is also important, like the personal budget, to have an emergency fund to help deal with such unforeseen expenses.
For example, if the heating, ventilation and air-conditioning system suddenly collapses and has to be replaced, this would be a variation in the budget that has to be financed.
Good budget processes can help develop and move an organization forward, while careless monitoring of budgets can blind an organization, affecting its health and long-term financial viability.