Thursday, April 29, 2010

The Budget Process

A budget is a blueprint for achieving specific goals. Your unit's budget is part of your company's overall strategy. So you need to understand your company's strategy in order to create a useful budget.

How can you familiarize yourself with your company's overall strategy?
  • Watch the overall economic picture. A company's strategy during a recession will be far different than in a booming economy. Make a point to listen to your manager's and colleagues' views on sales and the economy—and make your own observations as well. Are you deluged by résumés or is good help hard to find? Are prices rising or falling?
  • Stay on top of industry trends. Even when the economy is booming, some sectors are going bust; your budget will need to reflect that reality.
  • Steep yourself in company values. Every company has a culture, and the very best companies keep those values in mind during every decision. Suppose your budget calls for a cut in the company's contribution to health care plans. If the company's culture views such cuts as anathema to its overall commitment to employees, your proposal will be dead on arrival.
  • Conduct SWOT analyses. Every company has strengths, weaknesses, opportunities, and threats. Keep them in mind as you build your budget.
Top-down versus bottom-up budgeting

If your company does top-down budgeting, senior management sets very specific objectives for such things as net income, profit margins, and expenses. For instance, each department may be told to hold expense increases to no more than 6% above last year's levels. It's left up to you to allocate your budget within the parameters to ensure that the objectives are achieved. For example, suppose Amalgamated Hat Rack decides that it wants to increase overall profitability by 10%. That could mean, among other possibilities, launching a new product line to generate new sales, or cutting overhead by upgrading technology, which would reduce the need for part-time workers.

In addition, if your company does top-down budgeting, make sure to look at the overall plans for sales and marketing, as well as cost and expense plans, as you prepare your budget. The company's sales plan determines, to a large extent, how much money will be available for the budget. The marketing budget will give you an idea of what the company will be emphasizing in the coming year. Further, many companies that emphasize quality insist on reducing expenses every year, no matter how slightly, as a way to improve overall company quality. Thus, most major expenses—a new computer system, a new plant, a new field office—are carefully budgeted years in advance.

In companies that do bottom-up budgeting, managers aren't given specific targets. Instead, they begin by putting together budgets that they feel will best meet the needs and goals of their respective departments. These budgets are then "rolled up" to create an overall company budget, which is then adjusted, with requests for changes being sent back down to the individual departments.

This process can go through multiple iterations. Often it means working closely with other departments that may be competing against yours for limited resources. It's best to be as cooperative as you can with other departments during this process, but that doesn't mean you shouldn't lobby aggressively for your own unit's needs.

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