Establishing the Financial Budget

Establishing the Financial Budget
Monday, November 12th, 2012 Scott Bossart

                The year 2012 seems to have gone by fast and it is getting close to the fiscal year end for a majority of businesses.  While the fiscal year end doesn’t have to be December 31st, it does seem to be the natural choice.  Many businesses which once used July 31st or, even different quarter, for a fiscal year end, have made adjustments to change from this and coincide with December 31st.  In any case, as the organizations’ fiscal year end looms closer, financial budgeting rises up in the priority list.  While I won’t attempt to define or guide what the entire budget should look like, I will provide some topics for discussion during the budgeting process.  The more detailed the budget is, the better you will able to estimate, forecast, and monitor your operations and services.

                Ok, here I go again…the budget is and should be part of your Financial plan.  Budgeting does not have to be a complicated process, but can be if detailed financial tracking is not performed during the previous year.  Everything must be considered which will have a financial impact to the organization.  It is important to begin the process early before the end of the year, so it can be vetted, researched, reviewed, approved, and communicated prior to year end.  Typically one of two methods is utilized for establishing a budget.  The first is a top down approach where by only top organization leaders determine what the spending will be for the next year.  While this may seem to be effective, it often times creates discontent with the management staff and can place a strain on successful spending constraints.  The second approach is where lower management staff has input into what the budget will look like.  This method will often motivate and create by-in from lower management staff.  In either case, it is important to utilize historical data to produce, justify, and validate the new numbers for the upcoming year.  If you have not been very itemized or accurate in your financial endeavors over the past year, your task of establishing a budget will be somewhat harder.  While “harder” can be a relative term, it will definitely be harder in comparison to those who are more detailed and close to being anal when it comes to financial tracking.

                Once you fully understand your historical data, you can then apply your forecasting theory for the next year’s budget.  The forecast can be developed from multiple perspectives; Growth – where you plan to increase your current capacity, operations, output, etc.  Expansion – where you plan to expand your operation or services to include other buildings, assets, etc.  Sustainability – where you plan to simply hold your own in the upcoming year and focus on doing what you are doing.  Reduction – Where you plan to scale back on some operations or spending.  In any case, you have to consider the impact of regulations and insurance.  These cannot be taken lightly and many are not easy to understand enough for accurate budgeting.  The key is in the amount of research you do to gain knowledge around their overall impact and, or more specifically, their impact to your organization to what you are considering to be future state.  It takes more than simply listening to one sided or biased arguments for or against them.  While I will tell you some can be nearly impossible to determine exact cost impacts, your estimates should be realistic so as to not misjudge by a large margin in the sense that it creates a large negative impact to the organization.

                In the end, your fiscal year end is December 31st, and you haven’t already done so, you need to start developing the 2013 budget now.  The more people you get involved in breaking down the information and providing appropriate feedback regarding historical data, the better you will be at making the necessary decisions.  It will also go a long way towards your staff being better informed when the new budget is handed down.  Inclusion of those same staff members in developing the forecast will go a long way towards achieving success against the established 2013 budget.  In either case, it is important your finance department, whether internal or external, has validated the numbers to ensure targets and limits are accurately determined.  Any increase in budget numbers must be met with increases in income, reductions in operating costs, or improvement in efficiencies. While you may think you can simply continue into next year on the same path as this year, without an established budget plan you will not have any goals, limits, restrictions, or constraints to during the course of the calendar year decisions or tracking.  Getting people involved in your decisions, even if you make the final decision, will go a long way in their understanding of your financial vision and financial direction.

Stay Well

Scott B.


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