A company’s budget is just a theory unless there is follow-up and staff feedback. Weak links in a budget can include management’s inattention to the budget, large variances in the budget left uncorrected, and lack of communication. Those who actively use the budget may not be informed about how their budgets were determined or even what they contain.
In addition, upper management may choose to determine the budget and not invite the participation of those actually operating the business in its formation. This type of break-down in a company’s communication can cause a subsequent break-down in the budget’s effectiveness. Therefore, steps must be taken to improve the budgeting system overall.
Steps for Improving a Budgeting System
This process is year-long and must be followed by management in order to serve its purpose. The steps are listed in deliberate order. Following the procedure is essential but senior management is still responsible for enforcing the guidelines.
- Updated Expenses. In mid-November, each department should receive a list of all expenses. They should then update management of any expense changes.
- Updated Revenue. In mid-November, the sales manager should receive a list of revenue by month by business unit and provide any estimated changes in revenues.
- Updated Capital Expenditure. In mid-November, all department heads should receive a form requesting information about the cost and timing of capital expenditures for the upcoming year.
- Updated Automation. In mid-November, the manager of automation should receive a form requesting estimates of the timing and size of reductions in headcount in the upcoming year as a result of automation efforts. These figures should be compared closely with the timing of capital expenditures.
- Updated Budget Model. The budget should be thoroughly investigated and updated according to changes in the company.
- The Budget Reviewed. Note any significant budget differences for the upcoming year with the current year. Make sure they are justifiable.
- Revise the Budget as Needed. Revise the budget with the company’s president.
- Issue the Budget to the Management Team.
- Update the Accounting Database.