Module Six: Budgeting Made Easy

Budgeting does not have to be a difficult task. Knowing what information you should use and how to put it together ahead of time will make budget-making a painless process. A systematic approach to making a budget will reduce the time you need to create a budget. In this module, you will learn the following techniques that will make budgeting easier:

• Factoring in historical data
• Gathering related information
• Adjusting for special circumstances
• Putting it all together
• Computer-based methods

Let us see how factoring in historical data makes budgeting easier.

Factoring in Historical Data

When budgeting, using historical data could make the process easier. Using previous financial information could reveal trends that could help you determine specific budget numbers. For example, if sales have steadily increased by 10% over the last three years, this can be used to assume that it will happen again. Historical data could come from other businesses. Reading up on journals and reviewing reports could help give you more information on what could affect your budget numbers in the coming year.

When using historical data, ensure it is reliable and from a good source. You would not want to base your budget on false information. The results could be disastrous. Finally, historical data could be incorporated right into your budget report. This tactic is an excellent way to justify your budget. It also helps keep that historical information handy when doing your monthly review to ensure you are trending in the right direction.

Gathering Related Information

Here are four areas that may be helpful for your budget.

• Analyze the external environment
• Market trends
• Economic condition
• Regulatory issues
• Competition
• Analyze the internal environment
• New product developments may increase expenses
• Strength and weaknesses which is determined by reviewing the financial statements of the organization
• Analyze the staff requirements
• Can the staff handle the new strategic goals, or do you need to hire more people?
• Review existing policies
• Compare the effects of existing policies on the budget. Could some issues could alter the budget later?

The more information you gather from other areas, the easier you can determine your budgeting needs. Looking at these areas, you should realize that creating a budget involves time, but it does not have to be complicated.

Adjusting for Special Circumstances

Many times, a particular circumstance may arise which may affect the budget. Budgets are meant to be guides and should be regarded as flexible. But, of course, the budget should not be changed randomly or whenever something happens. 

When addressing unforeseen circumstances, building a cushion for risk is best. This technique is commonly used in project management budgeting. Project managers know that exceptional circumstances or risks could happen at any time. 

Here are some steps you can take to determine if you need to budget for additional exceptional circumstances:

1. List all potential issues that could affect the budget throughout the budget period.
2. Order the issues from the least likely to occur to the most likely.
3. Assess the cost of each issue if this circumstance were to manifest as reality.
4. Determine if this cost should be factored into a contingent reserve category on your budget.

The LOAD techniques help organize potential situations and categorize them so you can decide if these costs should be factored into a reserved category on your budget.

You should always seek approval before using the contingent funds. Furthermore, if the contingent funds are not used by the end of the budget period, they should be returned to the organization.  

Putting It All Together

There are many approaches to putting a budget together. Here are five steps you can take to putting the budget together. We even gave it an acronym so you can remember it later. It is called RADAR.

1. Research the internal and external environments to determine the factors that may affect your budget throughout the budget period. Then, adjust your numbers according to these factors.
2. Acquire the goals of the organization and every department, determine, and work with the leaders to determine what it will take financially to realize these goals.
3. Develop a working budget used by the budget team and used for the review process, making revisions as necessary. At a minimum, the working budget should contain the following columns:
4. Categories

                                                   i.    Assets, liabilities, and capital (balance sheet budget)

                                                  ii.    Income and expenses (income statement budget)

1.  
2. Actual (current or last year’s numbers)
3. Projected (budgeted)
4. Adopt a final budget for final review, gain the approval of the Board of Directors, and implement. The final budget can look similar to the working budget but with an extra column for variances.
5. Report results and revise the budget as necessary, showing all variances in the appropriate column.

Computer Based Methods

It is no doubt that computers make things easier. When creating a budget, computer programs can make this an efficient process. Computer programs offer these benefits when creating a budget:

• Allow collaboration across the organization
• Centralize the budget document and avoid duplication
• Reduced calculation errors
• Quick analysis
• Reporting features
• Graphs and visuals

Programs like Microsoft Excel and SharePoint make creating budgets more efficient and offer features that make sharing information easy.

Lesson Summary

Budgeting doesn't have to be a difficult task. In this module, you will learn several techniques that make budgeting easier:

• Factoring in historical data
• Gathering related information
• Adjusting for special circumstances
• Putting it all together
• Computer-based methods

Factoring in historical data helps you make accurate budget assumptions, while gathering related information (internal & external environment, new product developments, staff requirements, existing policies etc.) aids in understanding budget requirements. Special circumstances that may affect the budget should have a cushion for risk, while 5 steps (RADAR: Research, Acquire, Develop, Adopt & Report & Revise) and computer-based methods (Excel & SharePoint) make the process easier & efficient.