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Budgeting and Control in Business

Updated on November 2, 2011

Budgets have multiple purposes which go beyond being solely financial, so it is extremely important for managers to be involved in the budget process as they can influence the direction of the business. Some key lessons that I have learned as a Manager include the following.

1. Budgets have multiple purposes

During my career I have learned that while budgets are the financial guideline for the business, they also have other purposes. In my business I use the budget to manage sales performance and cost control across the Shop network. The sales targets are used to motivate and reward staff toward achieving their goals. The cost budget is used to performance manage staff to ensure that the network remains profitable. The annual budget cycle is also used for initiatives and to secure funding for major projects linked to the organisations long term objectives.

I have worked in other companies where there is no budget. This has been mainly in small businesses where a sales target must be achieved to cover fixed costs on a weekly basis. In these companies a budget would still be advantageous to motivate sales staff towards achieving sales targets and ensuring that administration and fixed costs are kept within budget.

2. Use sensitivity analysis to react quickly to market changes

In my current organisation we do not use sensitivity analysis as we do not have an integrated budget. There is an operating budget and a capital budget, but no cash budget. If I had access to an integrated budget for my business I would be able to regularly conduct ‘what if’ scenarios on my business. This could occur at the budget planning phase to assist initiative planning as well as being conducted each month as market conditions change.

Sensitivity analysis can also assist in report writing and planning, especially during periods of downturns, including:

  • Several ‘what if’ scenarios including increased sales, reduced sales, reducing staffing and the impact of each on expenses.
  • Strategies could have been developed for each ‘what if’.
  • The organisation would therefore be better prepared in future months to react quickly to either a further downturn or an increase in business.

3. The advantage of bottom up budgeting

One of the current successes of progressive businesses is the process of bottom up budgeting. This is getting the line managers involved in setting the budget and having buy-in in the success. Currently my managers set their expenses budget but I set their sales targets. The lesson for me is to engage better with my managers to get their buy in on achieving sales targets. I could achieve this simply by asking them to provide me a draft budget that I could review in line with the corporate budget and then provide feedback and adjustments as necessary.

4. You need to communicate the budget

A crucial process in budgeting is to communicate it to the staff. In my business the managers set the expenses budget and are handed their sales targets that are linked to the expenses budget. Once Board approval is gained each Manager receives a budget pack that includes their sales targets and expenses budget. They also receive an overall copy of the organisations total budget. Each month a variation report is issued and each manager must make comment on any variation. Communication is the key to get buy in from the staff and assists in budget attainment.

These key concepts can assist managers in developing better budgets and therefore better outcomes in managing your business.

Cheers

Michael

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    • charmike4 profile imageAUTHOR

      Michael Kromwyk 

      5 years ago from Adelaide, South Australia

      Thanks Cheetah786, I'm glad you found this useful. Cheers Michael

    • cheetah786 profile image

      cheetah786 

      5 years ago

      really useful and easy to understand tutorials on budgeting.. voted up

    • charmike4 profile imageAUTHOR

      Michael Kromwyk 

      6 years ago from Adelaide, South Australia

      Thanks Susan Starts Now!

    • Susan Starts Now profile image

      Susan Starts Now 

      6 years ago from California

      Very succinct explanation laying out the basics of budgeting for managers. Well done!

    • charmike4 profile imageAUTHOR

      Michael Kromwyk 

      6 years ago from Adelaide, South Australia

      Thanks lorenmurcia. You hit the nail on the head - all businesses have limited resources and it is important to ensure that you 'invest' the money where the best return can be gained.

    • lorenmurcia profile image

      lorenmurcia 

      6 years ago

      Good budgeting ability is truly an essential characteristic of a business owner. As a small business entrepreneur, it is so important how to channel my funds so I can earn more. Nice hub!

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