Business Budgeting: Planning and Managing Finances

A Company's Budget: A Financial Plan

A company's budget is the overall financial plan showing the expenditure of available funds. It is driven by the aims and objectives of the organization, as well as what the organization can realistically accomplish.

Key Budget Variables

Many variables in a business can be budgeted. These include:

• Sales
• Output
• Costs (operating and fixed)
• Profits
• Cash flow
• Capital investment

Budget Assumptions and Operating Budgets

The budget will be based on key assumptions about likely business conditions for the year ahead. These inform the detailed operating budgets that plan month-to-month sales, activity levels, and expenditure, for example, staff costs.

Flexible Budgets for Unexpected Changes

Managers may need to accommodate unexpected changes with flexible budgets. For example, if sales are lower than originally expected, the budget may need to reduce marketing expenditure and/or operational activities. An increase in orders may require additional recruitment costs for temporary staffing.

Zero Budgeting for Specific Projects

Sometimes, managers use zero budgeting. This means that they must start every year from zero and justify all planned expenditure, rather than starting from the previous year's figures. This may be appropriate for a specific, self-contained project.

Budget Allocation in Larger Firms

In larger firms, budgets are allocated for defined areas of responsibility, such as:

• Cost centers: Subdivisions of an organization that are a significant source of financial cost, for example, a factory or laundry operation.
• Profit centers: Units that contribute to the overall profits of the firm, for example, services to hotel groups.

Budgetary Cycle and Long-Term Planning

Budgets often cover one year but may form part of a longer-term plan, such as when a business is considering entering a new market.

Davis Service Group's Budgetary Cycle

Davis Service Group's budgetary cycle runs from January to December:

• By July/August, the financial targets for the coming year are agreed upon.
• In August/September, the budget is developed; accurate data is collected from the different profit centers based on the new set of assumptions made for the next year.
• In October of each year, these figures and assumptions are confirmed in formal review meetings.
• By December, the full budget has been finalized at the country level, as well as providing the overall Group data.

Importance of Consultation in Budget Setting

Davis Service Group is careful to set budgets in consultation and not to impose them on the different parts of the business. In this way, managers at all levels feel involved in the process and are more likely to feel motivated to achieve the targets in their budgets.