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Resources » Articles/Knowledge Sharing » General »
Budgeting Tips for Managers
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Budgeting is an important part in planning process. It is also considered as one of the controlling techniques. It is important to the managers to develop the skills of preparing budget. Some projects managers are independently responsible for the whole activities including financial activities of the organization. In this situation they are solely responsible for preparing budget and controlling the financial flow of the organization. Thus they should necessarily develop skills of preparing the budget and financial evaluation.
There are two basic starting points for budget. We can look either at what we did before or what we are planning to do. The first option, we review a prior year or years and then make changes where we think the future will be different from the past. In the second option we look at a written plan of what we are going to do. It may be planning about future expenses.
Both approaches are good and can start with either one. However, if accurate information is not available about the prior year or it is known that this year is going to be very different, and then manager has to work from a plan, rather than from past results. To make a really good budget, it is best to look at the budget both ways. Sometimes it is better to start from wok plan for the New Year. This depends a lot on how much production work is done and how much project work a manager can do.
Is a manager is creating a budget for production work; he is probably better off starting from last year’s budget. If he is working in much the same way then last years plan is a good start for this years plan. If he is creating a budget for a project he is better off starting with his project plan. Because projects are unique, something which has been done before is not a good model. Budget may be broken into different parts and each part can be done either way based on the past or on the plan.
Budget Preparation:
In this action manager relates a simple expense budget for the year from a prior year. Some activities included here are,
Gathering Information:
The first job is to gather accurate information about the past. This is not always easy. Sometimes, records are not kept well. Often, need to project next years budget before this year is over or before the information on this years expenses is ready. Sometimes, we can find out what we spent, but we can’t get the answer for the question why did we spend. It is important that we should have such a justification for each expense made in previous year. Because each expense is connected with activity we should be able to judge whether this activity continues future years. Thus preparing a good budget is detailed work. We need to know why we spent what we did and think about what will change. So we examine each line and using our own memory, meeting with others, and reviews of receipts and contracts. Then we can understand why we spent what we did.
Predicting the Future
Before preparing budget we should be able to predict the future and to be able to picture it. It is good to meet with people about what they want and what’s happening and they make a estimated or calculated guess. Own guess is also important because it is based on good information about experience, careful thinking and accurate calculations.
New managers are often afraid of writing down a lot of guesses and giving them to their boss. That's understandable. But that's all anybody ever does when predicting the future. But that's all anybody ever does when predicting the future. Reasonable and calculated guesses are the best we can do for budgeting. It may not be comfortable at first. But, if they follow the steps carefully and toughly, they will be surprised how often they will be right or close, as long as they understand how their office works.
Formulating and Finishing the Budget
After prediction of future requirement and converting them into figures first it is better to complete the larger line items. Then only it is needed to finish up the smaller ones.
In budget, smaller items should be totaled up first. For example in every project budget, running expenses are normally small items. All together they may be more than half of the budget. In that case, budgeting person should plan them carefully. On the other hand, the small items may add up to a tiny part of the budget, which isn't worth much of time. This allows the manager some flexibility to think about how people view his budget and his team. If they expect reasonable growth, then it is better to use a growth figure similar to the one used for the big items. If they tend to accept budgets at the beginning of the year, but make it very hard to allocate extra money later in the year, then it is good to put in higher numbers.
Adding Budgetary Assumptions
A budget is more than just numbers. Its sources of information and reasoning are important as well. With this information, manager and others can review the budget, improve it, and easily extent it into the future And, if errors appear, it's possible to trace the source of the mistakes. Perhaps his planning was right, but he was given the wrong information to begin with. He puts all this information into one- or two-page document called budgetary assumptions. But it should be short and simple. Also, it should be clear so that he can remember and explain all his ideas later if he needs to.
This document is brief but clear. Not all items are explained, only the most important ones, that is, the ones that changes most or the ones that were based on new rules. Yet this is enough information to make it easy to evaluate and improve the budget throughout the ever and to make it even easier to prepare a budget next year.
Checking and Delivering the Budget
After completion of all necessary works manager may ready to present his budget. But he is probably a bit nervous. To remove this it is better to take some one’s help to make final checking to find out the mistakes if any before presentation.
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Capitalization, spelling, punctuation, figures and grammar are also important and it never hurt to take a few extra minutes to make a document look good with stylish, professional fonts and formatting.
It is the responsibility of manager to focus on how he came up with the figures and how he expects the team to spend money and track expenses through the year. He should help them to make them responsible about tracking money and let them know and should support them in having what they need to do their job.
Project Holder or Chief Executive is likely to want to go over the budget carefully before it goes to accounting and finance. It's good to make the time to sit down with manager and review his assumptions. Manger may also want to change some items. For example, if manger knows that accounting routinely cuts each item by 10% it may be wise to increase the numbers to achieve the targets.
The financial department may or may not want to see budgetary assumptions. Some financial department will not want to see all of notes but will want certain very specific items. It is better to ask them for their guidelines and samples of the terminology they want to use. Much of what the financial department prepares is availed to stockholders or even the general public.
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