The budgeting process is not just filling out blank worksheets, with columns for every month and rows for each expense classifica¬tion. That’s only the beginning, the very first step in a more compre¬hensive operating system. In fact, the visible budget worksheet is only the first of three major steps in the complete budget.
The second step is the monthly review. The budget becomes worthwhile only when the managers of each department sit down together and review the budget in the light of what actually hap¬pened in all the revenue, cost, and expense categories. In this review, any variances are highlighted and explained.
The third step is the follow-up action that is taken when an unacceptable variance is discovered. This is the most critical step of all; it is where the real profits are maintained and created.
That is the budgeting process in overview. A more detailed, step¬ by-step explanation is given below:
Step 1. Plan. A properly prepared budget grows from a well¬ defined business and marketing plan. Without a plan, the organiza¬tion lacks direction. And without direction, the budget will be arbitrary.
The plan explains the current year’s marketing goals. The fore¬cast and budget are the financial expression of those goals, and they demonstrate that the goals are practical and can be achieved. The plan does not suggest that the numbers will fall exactly as shown, or even close. It does show that the plan is realistic and that it can be achieved. The numbers work.
Step 2. Goals. Setting goals as part of the plan is a logical and necessary step in the budgeting process. We should keep in mind that, in spite of the way things were done in the past, the worksheets, filled with numbers are only part of the whole. Those columns and rows should represent the financial expression-and realization-of clearly stated goals.
Step 3. Assumptions. The key to budgeting is developing intel¬ligent assumptions. For example, a sales forecast makes sense only when broken down by its component parts. So for example, if sales are generated by salespeople in the field, it makes sense to forecast based on assumptions about recruiting, attrition, and average pro¬duction. Expense budgets should be developed based on the components that logically constitute each category. The variable expense groups may vary with sales activity; overhead expenses are developed according to some logical pattern. Abandon the usual base for budgeting: percentage increases spread evenly throughout the year. These are useless to a need for analysis that will arise later in the year.
It also makes no sense to use the past, especially if the budget didn’t work. Ask yourself, if last year’s expenses exceeded budget, why are you using that outcome as the basis for the coming year? That’s building in excessive expenses rather than creating controls to reduce the spending level.
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