So much work goes into planning the perfect yearly budget. As your budget can drastically affect your profitability, you want to be sure that you account for as much as you can upfront. Among many others, this includes labour costs, materials, software programs. You also want to be able to leave some leeway, just in case something goes wrong and needs additional funds.
When it comes to budgeting methodologies, there is no one right way to it. Most companies develop their budgeting techniques over time. They learn how to prepare for certain costs and they get a better understanding of the sales cycles. For newer companies and companies looking for direction, there are a few budgeting methodologies that could help you effectively see your money in a new light.
Here are our four budgeting methodologies worth implementing.
This first budgeting methodology is perhaps one of the most common methods. During this process, your departments will estimate the costs of some of the higher-level tasks and use those estimates to calculate and constrain the lower-level tasks.
Once the budget is complete, it is then backed down from the upper management positions to the people in the lower positions. This ladder-like method helps other employees better understand what the company or department is trying to achieve and what is expected of them in their daily tasks.
The one great thing about this budgeting methodology is that it does not require people from all different levels to complete. That means that less hands will be in the mix, reducing the risk of something going wrong. Your heads of departments and supervisors, whichever is responsible for budgeting, can do this on their own.
Though this method is effective, it does require that your supervisors and department heads have plenty of experience with budgeting and can make good judgments about how much they will spend in the coming year. Make sure that your budgeting supervisors have a good grasp on how much their daily operations cost. If they don’t understand, they may grossly underestimate their costs.
You might have heard of this type of budgeting referred to as zero-based budgeting, but the two are one in the same. As the name implies, you work from the bottom calculating your potential costs and build up from there. It's best to choose a common project model that is frequently used and base your budgets around its costs.
Let's say you own a house cleaning business and want to budget for the next six months. Most of your jobs require two employees so you would start with them. When cleaning a house, how much soap and carpet cleaner do they use? How many cleanings did they do in the last six months? Next you might go up to a supervisor in charge of purchasing vacuums, mops and other supplies. How much do they spend to purchase new items or repair them?
Once each level completes their work, you'll be able to see roughly how much you will need to budget for the period of time. This method does take a little while longer, and it does require help from multiple levels of people, but it does also encourage commitment and teamwork.
This method often gives way to a more accurate budget because you are getting your numbers from the people who know them best. There is an easy flow of information, and everyone feels like they had a hand in the process.
If you are not a fan of looking at numbers for too long, you may not like the iterative process, which simply means 'to repeat or do again.' However, it is certainly an effective budgeting methodology.
The process mainly involves you implementing top-down and bottom-up budgeting methodologies. The only difference is that once your employees are done with both of those budgets, they are analysed, compared with one another, negotiated and finally, reconciled.
All of the benefits of top-down and bottom-up are at work here. There is plenty of information flowing between all levels of the company so upper management can better see how money is spent on the more tertiary level and lower employees can understand what upper management is looking for in terms of spending.
As employees on all levels are involved, the iterative process demands teamwork. Everyone has to bring their A-game, and there can be no miscommunications between lower management and upper management.
This final budgeting methodology involves bringing forth last year's budget and using it as a framework for the new budget. In a lot of ways, most of the work is already done for you. All you have to do is review each aspect of your budget and adjust it accordingly for certain known factors, such as an increase in labour sizes or a drastic change in petrol prices.
The phrase, 'If it ain't broke, don't fix it,' applies here. This method is best for companies with somewhat stagnant costs. If you know certain things worked well for you last year, it is okay not to change them. You can also better prepare for potential hiccups that you encountered last year. Maybe one of your cleaning business' trucks broke down and needed serious repairs. Make sure you have enough in your budget to cover yourself, should that or something similar happen again.
This method is both easy to understand and requires little negotiation as the budget does not usually change very much. They key to this process is to make sure your managers are looking for any budget slack, unused funds that could be used better elsewhere, and that they are looking for any positions or funds that no longer apply to the budget. If you got rid of your feather dusters last year and now use a vacuum cleaner to dust furniture, then you need to be sure you are not budgeting for feather dusters.
Budgeting is a unique process and it is essential that you do it correctly. Think about how your company operates and decide which methodology suit your needs the best.