(This video chapter begins at 07:51 and ends at 09:16. Click on the blue dot at the 07:51 timestamp to play the video for this module.)

Budgeting Made Easy

Budgeting does not have to be a difficult task. Knowing what information you should use and how to put it all together ahead of time will make budget making a painless process. Having a systematic approach to making a budget will reduce the time you need to spend on creating a budget.

Our focus quote for this module:

“About the time we can make ends meet, somebody moves the ends.” – Herbert Hoover

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 certain 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 to give you more information on what could affect your budget numbers in the year to come.

When using historical data, make sure 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 in to your budget report. This is a good way to justify your budget. It also helps to keep that historical information handy when doing your monthly review, to make sure 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
  • Strengths and weaknesses which are determined by review 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 there be issues that 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 difficult.

Adjusting for Special Circumstances

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

In order to address unforeseen circumstances, it is best to build in a cushion for risk. This technique is used commonly in project management budgeting. Project managers know that special circumstances or risks could happen any time.

Here are some steps you can take to determine if you need to budget for additional special 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 helps organize potential situations and categorize them so you can make the decision if these costs should be factored into a reserve 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, it 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 both the internal and external environments to determine the factors that may affect your budget throughout the budget period. 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. This is used by the budget team and is used for the review process, making revisions as necessary. At minimum, the working budget should contain the following columns:
   1. 1. 1.  Categories
            • Assets, liabilities and capital (balance sheet budget)
            • Income and expenses (income statement budget)
         2. Actual (current or last year’s numbers)
         3. Projected (budgeted)
4. Adopt a final budget for final review, gain the approval by 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

There is no doubt that computers make things easier. When it comes to 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.

Practical Illustration

Zach had been tasked with creating a new budget for his department. The first thing he did was review past budgets and compare the projected outcomes with the actual outcomes. This helped give him an idea of the effectiveness of past budgets, and where changes would need to be made to reach current goals. Next, he systemically developed the budget. He researched internal and external environments such as market trends and the company’s strengths and weaknesses in adapting to changes in the market. He consulted the managers who worked under him to get an idea of what goals needed to be met. Finally he submitted the budget to be reviewed and approved by the board of directors.