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You will probably have come across budgets in one form or another in the past but you might want to recap on the basics for your own knowledge and/or for briefing a team member.
How Can You Define a Budget?
A budget is a financial plan. It is a statement of how much money you will allocate to different items or activities that you or your team will undertake.
Why Do You Need a Budget?
All teams need to make the best use of their resources. A budget is a way of working out how to divide up your financial resources across different activities or projects. It is also a tool against which to monitor your activities. All in all, the budgeting process is a method of planning and controlling your activities against your financial objectives.
What you can do with your team may be constrained by how much money you have available to you. You have only a set amount of money to spend on your activities so you need a way of determining how much you should spend on the different things in order to achieve your objectives.
What is the Budgeting Cycle?
There are several stages that you go through when you create and use a budget. Below is a typical example of a budgeting cycle that outlines these stages. You can apply it to the day-to-day work your team does or to specific projects that your and your team members are working on.
Stage 1: 'Establish Goal'
This is where you decide what your aim is, i.e. what you want to achieve by creating the budget. You then use your budget to plan how you will make this a reality for you and your team.
Stage 2: 'Decide on Type'
There are many different types of budget and these vary in purpose, content and format depending on your goal. The type of budget you are going to create will impact on how much time you need to work on it, what data you will need to create it, who you will need to speak to in order to gather your information and how you will lay it out. It is essential to be clear on what type of budget you want to create before you start working on the detail of the task.
Stage 3: 'Plan and Allocate'
This is where you start to get into the detail of your budget. You need to work out how much money you have and what you are going to do with it. This will involve gathering data and making decisions on how you will distribute your funds across the different areas of the budget. You will then fill in the numbers according to the correct budget format.
Stage 4: 'Control and Monitor'
Once you have created and implemented your budget you need to make sure you stick within it. Remember there is no point in producing a plan if you are going to ignore it. As you go along you should track how you are performing against your budget. If things are not going according to plan then you need to find out why and whether this is acceptable. You might need to take some action to get back on track.
Stage 5: 'Evaluate Process'
This is a stage that people often miss out. You have created your budget and used it throughout your activities, controlling and monitoring as you went along. Now that you have finished this process it is a good idea to reflect on how well it went. Did your budget help you achieve your goal? Was your budget realistic or did you find that you had the wrong data or made any incorrect assumptions? What would you do differently? What went well? What would you do again next time? What new ideas have you come up with that would help you in your next budget?
Should This be the Responsibility of the Finance Department?
Individual budgets should not exist in isolation and it is the job of the finance department to check that they fit together sensibly in order that the overall financial goals of the organization can be achieved. Your job is that of ‘budget holder’. A budget holder is the person who manages the day-to-day team activities in line with a budget. A budget is ultimately there to help you do your job better and since you are the one actually doing the job you need to take ownership of the budget. Your finance department can help you do this but it cannot actually manage your budget for you.
How Long is the Budget Period?
In planning and allocating your budget you need to decide what budget period you will be using, i.e. the period of time that your budget will cover. This will be determined by:
- the purpose of your budget
- your information needs
For example, the budget period for a team away day is shorter than the budget period for a project to research and develop a new service.
The budget period will also be influenced by the financial managment periods that your finance department review and report on, e.g. monthly management accounts or annual financial statements.
The most frequently used budget period is one year with the annual budget divided into months for reporting and review. It is important, however, to match the length of time that the budget reports on to the activities that you are budgeting. If your activities vary dramatically from month to month, it would be wise to plan your budget this way instead of just dividing your annual figures by 12 to give a monthly approximation.
