November 29, 2021

The Fundamentals of Budget Management

3 min read

The budget management process starts at the beginning of the financial year when key stakeholders (departmental budget managers and finance staff) create the financial year’s budget. First, executive management and finance staff analyze the large-scale picture. They determine how much revenue the company has to work with, particularly based on cash inflows, costs, and other variables. Once this information is in place, budgeting can begin. Key decisions include which expenses to include, the types of services to offer, the timing and amount of these services, and whether additional funding is required.

During budget management process, budget managers typically categorize activities according to whether they are required for meeting program objectives or are helpful in meeting the company’s objectives. For example, some programs are necessary to meet customer requirements but may not be necessary to increase the company’s competitive advantage or to create a positive financial environment. Managers categorize these program costs under cost items.

Within each cost item, managers make discretionary choices about the types of vendors to use for these services. These decisions often reflect management’s priorities for budget management process because the manager will often have a strong preference for a vendor over two or more competing vendors. However, the decisions about vendors may not reflect the real needs of the finance department. Finance staff must identify vendors that can deliver these types of services inexpensively and at a reasonable time frame. Finance staff must budget for these types of vendors, as well as vendors that will provide the services that the budget managers need at a reasonable cost.

Another way that the budget management process differs from the traditional master budget process is that budgeting occurs on a cash-basis. The difference between this type of budgeting and the traditional budgeting process is that expenses on a cash basis are established when budgets are first established. In the traditional budgeting process, budgeting occurs after the initiation of a cash flow model (which determines the effect of cash management decisions on the company’s credit and debit accounts).

A final distinction in the budget management process is the level of detail that is provided with the budgeting tools. A major component of the traditional master budgeting process is the creation of a comprehensive and frequently updated cumulative balance sheet. Budgeting tools include comprehensive balance sheets that show the day-to-day financial activity for the company, including: sales, inventory, and financing; and cash and accounts payable information regarding the purchase, payment, and collection of funds for daily operations. Additional tools typically offered by a budgeting company include: trend analysis and financial projections, which are designed to help budgeting organizations understand and predict future financial activity. These tools are particularly useful to budget management teams that are engaged in analyzing their company’s long-term viability.

A final aspect of budget management that helps ensure its effectiveness is the generation of spending reports, which are often presented to upper management and stakeholders. Spending reports are designed to provide a concise overview of spending in terms of dollar value, identifying the drivers of spending, identifying areas of opportunity, quantifying the spending and identifying trends or deviations from the budget, among other things. This helps ensure that upper management is made aware of the spending processes and activities of the organization, which can prove to be invaluable to both the success and the failure of the budget management process.

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