Budgeting

Budgeting — one of the company main management tools, business performance and achievements of strategic objectives and tasks. Budgeting can be considered as technology of financial planning.

The concept of budgeting is strategically oriented Balanced Scorecard — BSC (BSC — Balanced Score Card). According to the strategic plan of the company development work out strategic maps which reflect its purposes in four projections: «Finance», «Clients», «Business processes», «Personnel». For each projection identifies key success factors and their indicators — key performance indicators KPI (KPI — Key Performance Indicator). «Finance» strategy of the company is provided to projections either growth strategy of the income, or cost reduction strategy. As key performance indicators such indicators, as a market share, profitability of business, a free cash flow etc. act. Achieving these indicators characterizes the success of the company’s strategy. For KPI calculation create the budget indicators — sales volume, direct expenses and overhead expense under articles of expenditure, etc. The budget indicators of departments are a component of the company budget indicators. Achievement of budget indicators should be reflected in the system of motivation, which is a link between the purposes of the company and the personnel purposes.

Budget — is a plan for a certain period in the quantitative (usually cash) indicators, constituted for the purpose of effective achievement of strategic reference points. Budgeting is continuous procedure of creation and performance of budgets. 

Basic principles of Budgeting implementation:

  • it is performed by in advance approved rules on the basis of which the budgeting system will be under construction: methodologies, registrations of tabular forms, financial structure etc.
  • creation of regulations of budgeting — organizational procedures;
  • automation of budgeting process, first of all the planning, the procedures detailed in regulations on budgeting.

Creation of final budget forms:

  • the income and expenditure budget, determining cost efficiency of the company;
  • cash flow budget, i.e. direct planning of financial flows;
  • the balance estimation, reflecting economic potential and a financial condition of the company.

The obtained data are initial for the management analysis, for example for calculation of coefficients. Further, the stage of correction, coordination, solutions of problem questions begins. All process of budgeting comes to the second circle, and as a result one part of quantitative information passes into category «obligatory to execution», and another — into category of the next specified plans. 

Efficiency of budgeting — in following to the principles of consistency and continuity.

Budgeting is a key element of the internal control and adjustment of strategic development of the company. Budgetary control allows us to monitor deviations from the set targets and identify trends in the development of the company. Thus, the budget management system — a system of management by exceptions. It is the system of management by exception, not a system of search and struggle with exceptions. 

Approved budgets are obligatory to execution

Thoroughly researched budget last few «top down» integrations (setting the direction of policy-oriented budget indicators based on marketing information) and «bottom-up» (development of operating budgets units based on actual historical data), allows to manage the company’s resources with maximum efficiency.

Implementation of budget management system gives the chance of delegation financial responsibility for the result of activities to top-managers of business units — divisions. Step-by-step creation of a budgeting system assumes originally the Centers of Financial Accounting (CFA) without the right of independent decision making in the field of forming of the income and expenses, development single for divisions of formats of budgets, working off of the budget regulations (procedures of acceptance, adjustment, control and the analysis of the budget indicators), the preliminary analysis of accomplishment of budgets. After effective implementation of the budget model, power are delegated to divisions for forming of financial result and to level the status up to the Center of the Financial Responsibility (CFR).

Budgeting, in case of implementation all complex of actions, is effective technology of business management.