Budgeting Process Overview

This article was first published in February 2018 and was updated in November 2024.

Successful businesses rely on effective business planning by an owner or top executives. The budgeting process is one of the most critical elements that can make or break a company. It’s an ongoing endeavor that adapts as revenues and expenses fluctuate.

Because the budget planning process often gets complex, many companies have started relying on automated workflows developed in platforms like Nutrient Workflow. Doing so helps improve an organization’s efficiency, reduces manual labor, and increases overall productivity.

What is a Financial Planning and Budgeting Process?

The budgeting process is the series of steps organizations take to prepare and execute budgets for a specific period. For example, a sporting goods company may perform budgeting steps to determine how much they want to allot to produce footballs for the next year based on projected sales. A finance company may also use the budgeting process to cover their expected operating and non-operating expenses for the next quarter.

Companies typically look at past budgets to get a more accurate budgeting picture to see how well they worked out. Senior executives and managers involved in budgeting also assign specific amounts to spend on different expenses. A company’s budget is the final step in implementing a business plan.

Inaccuracies in any budgeting process steps can lead to cash flow problems. A company can’t survive if they don’t have enough money to cover its expenses. Therefore, organizations must do everything possible to enforce consistency and accuracy in budgeting.

Definition and Importance

Budgeting is a systematic process that enables organizations to allocate their financial resources effectively, achieve their strategic objectives, and maintain financial stability. It involves creating a detailed financial plan that outlines projected income and expenses over a specific period. The importance of budgeting lies in its ability to help companies make informed financial decisions, prioritize initiatives, and optimize the use of available resources. By having a clear financial roadmap, businesses can navigate uncertainties, plan for growth, and ensure they are on track to meet their long-term goals.

Benefits of Budgeting

The benefits of budgeting are numerous and can be summarized as follows:

• Improved financial management: Budgeting enables companies to manage their income and expenditures effectively, ensuring that they have sufficient funds to meet their financial obligations.

• Enhanced decision-making: By providing a clear picture of the company’s financial situation, budgeting enables managers to make informed decisions about investments, funding, and resource allocation.

• Increased transparency and accountability: Budgeting promotes transparency and accountability within the organization, as it requires managers to justify their financial decisions and ensure that they are aligned with the company’s strategic objectives.

• Better cash flow management: Budgeting helps companies to manage their cash flow effectively, ensuring that they have sufficient funds to meet their financial obligations and take advantage of new opportunities.

• Reduced financial risk: By identifying potential financial risks and opportunities, budgeting enables companies to develop strategies to mitigate these risks and capitalize on opportunities.

Financial Planning and Discipline

Financial planning and discipline are essential components of the budgeting process. Financial planning involves identifying the company’s financial goals and objectives, assessing its financial situation, and developing strategies to achieve its goals. Financial discipline involves implementing these strategies, monitoring progress, and making adjustments as necessary.

Effective financial planning and discipline require:

• Clear financial goals and objectives: Companies must have a clear understanding of their financial goals and objectives, including their revenue targets, expense management, and cash flow management.

• Accurate financial data: Companies must have access to accurate and timely financial data, including financial statements, budgets, and forecasts.

• Robust financial systems: Companies must have robust financial systems in place, including accounting systems, budgeting software, and financial reporting tools.

• Strong financial management: Companies must have strong financial management in place, including experienced financial managers, effective financial controls, and a culture of financial discipline.

What are the Stages in the Budgeting Process?

The entire budgeting process typically involves four distinct phases. When done correctly, your organization should accomplish the following goals:

• Create clear targets and expectations for expected costs and revenues.

• Set the stage for requesting additional funding from banks or outside investors.

• Outline global guidelines on how internal departments should establish priorities.

• Maintain expectations on what organizations can accomplish based on available funding.

• Keep the finance department connected with what’s happening in the rest of the company.

• Provide executives and owners with visibility and control overspending.

Let’s look at what’s involved in each phase of the budgeting process.

Preparation

One of the most critical budgeting steps is reviewing your organization’s financial information. Some of the questions you should answer during your evaluation include:

1. When you set past budgets, did you spend more or less than expected?

2. Did you hit the growth targets forecasted for your last budget?

3. Were there any barriers encountered that you didn’t expect?

4. How difficult was it to enforce the budget?

If you work in a larger organization, asking for input from the budget managers of different business areas is a good idea. Let them provide you with answers to the same questions for that department. In addition, consult with team leaders to see how well the budget worked out and clarify where they may have run into issues throughout the last budget period.

Once you’ve gotten that input, start calculating the revenue you expect from the organization. First, identify all revenue streams and calculate your gross profit. For example, our sporting goods company should list all products produced, their cost, and how much volume they expect over the next year.

Other essential steps in this phase of the budget planning process include:

• Setting your fixed costs or overhead

• Accounting for variable expenses like marketing and corporate investments

• Establishing forecasts for any additional one-off spending like a merger

• Reviewing cash flow

Approval

Once you’ve established your budget parameters, it’s time to get through the budget approvalprocess. In many instances, internal political issues can make things more complicated. Going back to our sporting goods business example, let’s say they have a budget committee established to make a final yes or no decision on your budget. In addition, there may be other executives designated to provide a sign-off. Make sure you address any questions that stakeholders may put forth in the preparation phase of the budget planning process.

An automated workflow can help speed up the approval process by providing a convenient and trackable way for all stakeholders to review and approve documents. That way, you can ensure you get the right signoffs at every approval process stage. In addition, you can establish contingency plans in alternative workflows if there’s a delay or the approver is unavailable. Finally, digital copies of approval signoffs allow you to create a clear data trail for future audits.

Execution

Once a budget receives final approval, it’s time to distribute funds allotted to various departments. That duty is typically the responsibility of a CFO or a company controller. Instead of relying on manual distributions, organizations can use Nutrient Workflow workflows to automatically distribute funds to the correct business area. That cuts down on waste, helps budget owners keep track of unspent funds, or warns them if they’re in danger of overspending.

Evaluation

Automating budgeting process steps with workflows makes it easier for organizations to set up reporting. In addition, cutting down on manual data entry makes it easier to collect and record data on expenditures from the approved budget.

Organizations can integrate a workflow automation platform with an ERP system to extract additional data. That keeps data compliant when the time comes for an audit. The finance department can rely on a centralized data repository instead of accessing multiple platforms to pull together comprehensive reports.

Approaching Budget Management

Approaching budget management requires a structured and disciplined approach. The following steps can help companies to develop an effective budget management process:

1. Establish clear financial goals and objectives: Companies must have a clear understanding of their financial goals and objectives, including their revenue targets, expense management, and cash flow management.

2. Assess the company’s financial situation: Companies must assess their financial situation, including their financial statements, budgets, and forecasts.

3. Develop a budget plan: Companies must develop a budget plan that outlines projected income and expenses over a specific period.

4. Implement the budget plan: Companies must implement the budget plan, including allocating resources, managing expenses, and monitoring progress.

5. Monitor and review the budget: Companies must monitor and review the budget regularly, making adjustments as necessary to ensure that they are on track to achieve their financial goals.

Key Principles

The following key principles can help companies to develop an effective budget management process:

• Align the budget with the company’s strategic objectives: The budget must be aligned with the company’s strategic objectives, including its revenue targets, expense management, and cash flow management.

• Use a zero-based budgeting approach: Companies should use a zero-based budgeting approach, where every expense must be justified and approved.

• Prioritize expenses: Companies must prioritize expenses, focusing on essential expenses and eliminating non-essential expenses.

• Monitor and review the budget regularly: Companies must monitor and review the budget regularly, making adjustments as necessary to ensure that they are on track to achieve their financial goals.

• Encourage individual budget managers: Companies should encourage individual budget managers to take ownership of their budgets, providing them with the necessary training and support to manage their budgets effectively.

Improve Your Budgeting Process with Nutrient Workflow Automation

Nutrient Workflow helps companies maintain cash flow and enable growth using automated workflows to manage various budgeting process steps. Learn more about how our platform helps simplify the budgeting process by setting up a software demo.

Interested in Automating Your Budgeting Workflow for Individual Budget Managers?

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FAQ

What is the budgeting process?

The budgeting process is a series of steps to plan, approve, allocate, and evaluate a company’s finances over a set period.

Why is budgeting important for a company?

Budgeting helps manage financial resources, make informed decisions, and align spending with business goals, ensuring financial stability.

What are the main stages of the budgeting process?

The main stages are preparation, approval, execution, and evaluation.

How can automation improve the budgeting process?

Automation reduces manual work, speeds up approvals, and improves accuracy, helping organizations focus on strategic financial goals.

Who typically oversees the budgeting process?

Finance managers, budget managers, or CFOs usually oversee the budgeting process in an organization.