5 Corporate budgeting exercises to help keep business expenses in check
Creating and abiding by budgets is one of the best practices to keep business expenses in order. You can outline the expense categories and determine fund allocation through budgets based on past experiences and future requirements.
Budgets create a standard against which employees decide which more cost-effective decisions, optimizing the outcome.
Corporate budgeting is different in terms of costs and the parties involved. Budget exercise is carried out keeping in mind the interconnectedness between various departments.
Planning for revenue and expenses is not an overnight task; it demands inputs in the timing of inflows and outflows, considering unforeseen events, and the ability to incorporate immediate changes.
This article mindfully takes you through every aspect of corporate budget planning and how to nail it.
Corporate budgeting exercises are meticulously planned future courses of action for cost-cutting, maximizing profits, and boosting the company's financial performance.
These exercises are methodical steps based on past performance of the strategies adopted.
Usually, budgeting exercises are conducted annually while in the budget planning sessions.
But considering the volatility of the business environment, sometimes these sessions are spurred by financial uncertainties and underperformance of a product.
Corporate budgeting is inclusive of many types of budget techniques. Below mentioned are the two most common types of budgeting for organizations.
1. Master plan: Master Budget or plan, as the name suggests, is the aggregate of all the budgets. This is the preliminary budget which consists of all other budgets.
2. Operating budget: An operating budget is a short-term budget based on a company’s projected growth rate. It is simply the prediction of a company's expenses and revenue.
3. Cash flow budget: This budget ensures adequate maintenance of the balance between cash inflows and outflows. A cash flow budget allows better visibility over the company's liquidity position and its ability to meet payment obligations.
4. Sales budget: The sales budget includes all the future expenses incurred to achieve the sales target.
5. Static budget: Static or fixed budgets are the budgets that shall remain unchanged for the entire financial year. They are not changeable under any circumstances, i.e., an increase or decrease in sales does not affect the static budget. Usually, not-for-profit organizations use a fixed budget owing to the specified amount of percentage of the donation.
This isn’t necessarily a budgeting technique but an approach that can be considered while formulating budget drafts.
1. Top-down budgeting: Top-down budgeting is that form of fund allocation wherein the top-level management provides resources and funds across all departments.
The top-level managers create the business budget as a whole and allocate departmental budgets aligning with business objectives and KPIs. This approach uses past data and market conditions to fuel the budgeting process.
2. Bottom-up budgeting: This approach kicks off at the department level. Individual departments submit their requisites for upcoming budgets based on their needs and considerations.
Departmental heads submitted their siloed requirements subjected to approval or disapproval from the committee.
Business budget preparation and revision is a taxing task. Therefore, deploying the right approach before finalizing the budget draft provides greater flexibility when the budget needs to be reconsidered.
Below are the some ways to ensure your corporate budget planning accords with the organization’s financial expectations and helps better assess cost-effective alternatives.
Goal setting is an easy-peasy task if done without critical thinking and situational analysis. Identifying the appropriate and achievable goals provides a lens through which employees can assess their performance against.
To reduce overhead costs or maintain an adequate ratio of working capital, you need to revamp and align your budgets to your goals.
In other words, budgets are the roadway to your specified targets. With your budgets and plans not being on the same page, you are bound to mess up your financial skeleton.
Expressing budgets in numerical terms is not the definitive way to act upon your financial goals.
A budget should never just be concerned about the numbers but can reflect the strategic objectives. Because in the end, the strategic goals are the first to be visible.
For example- is your strategy to survive or expand? Whatever it may be, you need to decide beforehand because your plan requires pool resources from the budget.
The effectiveness of policies varies from time to time. Maybe the policies adopted reaped the best benefit to the company in the past, but now they might fail to do so.
While policy review, companies can unwrap the existing policies causing excessive draining of funds and scout for alternate approaches.
For example, if employees are given complete autonomy to choose the hotels of their choice while on a business trip, they are inherently more inclined to select a more lavish accommodation as they know they will be reimbursed later.
On the contrary, if HR is given this responsibility, they will opt for more economical accommodation with the best amenities. This might seem an insignificant policy change, but companies get to save a lot more than expected if compounded annually.
No budget can be fully secured from wasteful spending because trimming it will unnecessarily contract the spending capacity of budget users. But the management cannot turn a blind eye towards it too.
Therefore, through correct measures, management needs to identify the expenses heavily pulling down the budgets and eliminate them for further use.
For example, departmental activities are often connected; this increases the possibility of overlapping work leading to redundancies and multiple uses of resources for the same purpose, thereby increasing the cost of operations.
Having a strict budget causes a unidirectional flow of efforts. Practicing a strict budget with no scope for changes often leads to more losses than profits because of their inability to incorporate fluctuations.
With the Covid-19 pandemic, employees were shifted towards remote working, which shackled the pre-existing policies and budgets.
The outlook of employee benefits too took an up-face. Companies stressed more employees’ health and well-being, which caused a rise in employee benefits.
Organizations must follow the practices of corporate budget management. Without business budgets, companies lose track of their business expenses, and the bottom line is an intense cob-web of financial mismanagement.
Corporate budget planning is not confined to fund allocation alone. There are many more reasons to relish this process:-
Budgeting clearly defines the available funds for use. Managers can redefine the departmental workflow to keep the processes more efficient and economical.
Similarly, the management also focuses on how employee roles are significant here. Their actions should be in accordance with budgetary policy.
If you are a startup eyeing venture capitalists or other funding institutions, the document showing your spending areas is the most crucial.
They gauge how you prepare the budgets, the principles you apply for budget creation, how well you implement it, and the ways you settle things when things move out of control.
The most critical observation while sketching out your budget is understanding the spending nature of the companies. Every company has its own set of expenses which differs in terms of fund allocation and usage.
Some companies invest heavily in after-sales services, while others focus on reducing overhead costs. Whatever might be the end goal- budget sessions offer deep insights into how the employees are churning the funds to achieve organizational goals.
With automation in almost every business sphere, carrying out tasks has become much more effortless than ever. Corporates now don't spend hours drafting multiple budget proposals.
They simply deploy spend management tools for this purpose. Our corporate budgeting tools can handle massive amounts of data entries and process them in seconds.
To make your spending more budget-compliant, the software runs back-end checks to understand the spending habits of your employees.
To keep employee expenses within the order, you can set spending limits on their corporate cards and issue guidelines for reimbursements. You can set different budget amounts for other purposes and know how much of it has been exhausted and left.
Related read: How Volopay can help with departmental budgets