Why is it important to budget efficiently

Budgeting - How to Create Realistic Budget Plans

A contribution by Dr. Christian Wurditsch - entrepreneur, investor, business angel

Everything you should know about budgeting and creating realistic budget plans

(or what a budget or a financial plan has in common with a hiking map)

Fact box for those in a hurry

  • Budgets are important
  • Anyone can budget
  • Realism is a key to success
  • Software supports immensely

What is budgeting

Budgeting (also budget planning, financial planning) is the business planning process for business entities to create a budget. The budgeting defines certain target specifications that are to be achieved within a planning period (in companies usually 1 year).
The aim of budgeting is therefore to map the planned future in the form of numbers and to record it in the budget.
Budgets are created for private households (budget) and companies (budget) but also for public institutions, from municipalities to federal states to the state / federal government (budget), and form the basis for performance measurement and performance monitoring.

What types of budgeting are there?

There are a number of types of budgeting. Here are some examples:

  1. Operational budgeting
  2. The strategic budgeting
  3. The retrograde budgeting
  4. Progressive budgeting
  5. The countercurrent process
  6. The area-related budget planning
  7. The program-related budget planning
  8. Zero-base budgeting

There are also fixed budgets and flexible budgets - further variants of budget planning result from classification features such as the budget unit, the default size, the reference period, the flexibility and the method of determination.

Let's briefly look at the characteristics of the types of financial planning mentioned.

Operational budgeting

The objective of operational budget planning is the creation of short-term budgets, which facilitate the planning and control of the available financial resources for a period of i. d. Usually serve for up to a year.

The strategic budgeting

In contrast to operational budget planning, which is used to create short-term budgets (monthly, quarterly or half-yearly and annually), strategic budgeting is used to plan long-term budgets. The goals and targets are set for a period of up to 10 years.

Retrograde budgeting (top-down)

With central retrograde budgeting, the budget begins with the management and is broken down into the smaller organizational units.

Progressive budgeting (bottom-up)

With decentralized progressive budgeting, the creation of the budget begins in the smallest organizational units in the form of partial budgets or partial plans (sales plan, sales plan, personnel plan, investment plan, liquidity plan, material plan, marketing plan, etc.) and are summarized (aggregated) into an overall budget at the top level ).

The countercurrent process

In the countercurrent process, retrograde and progressive budgeting are used in order to use the advantages of both types of budget planning and to eliminate weak points.

The area-related budget planning

In area-related budget planning, i. d. Usually based on the available resources. In this context one speaks of the input-oriented budget planningwhich is mostly based on past experience.

The program-related budget planning

With the program-related budget planning one orientates oneself i. d. Usually on the goals to be achieved. In this context one speaks of the output-oriented budget planning, from which the resources required for the package of measures to achieve the output are first derived.

Zero-base budgeting

With zero-base budgeting, in contrast to the usual planning, which is based on the currently available budget, the budget is planned from scratch. Each department defines various measures for the coming period and the overall budget is divided among the respective measures according to priorities. Due to the constant rethinking of the measures, this is a very efficient form of budgeting.

Now that we've discussed the basics of budget planning, let's see what you should know about budgeting and creating realistic budget plans.

2 questions that we are often asked about budgeting:

  • What steps need to be taken into account in effective budgeting?
  • How do I make sure that my plans, especially the all-important liquidity plans, are as realistic and useful as possible?

Here are our thoughts on it.

What steps need to be taken into account in effective budgeting?

Depending on the type of budget planning, different and different numbers of steps are necessary to create a budget. Ten individual steps are necessary for traditional budget planning.

  1. It is determined whether there have been any significant changes in the company, in company goals, resources, etc. compared to the previous financial plan.
  2. A forecast is made of budget-relevant factors. The data for the past period serve as the basis for the forecast.
  3. Budget targets for the company are set. The data and information determined in points 1 and 2 serve as the basis.
  4. There is a total budget - i. d. Usually by the company management - proposed (top-down).
  5. Individual budgets are planned by the decentralized planning departments (bottom-up).
  6. The budget requests from the decentralized planning departments are passed on to the next higher level.
  7. It is checked whether the budget requests are compatible with the specified formal objectives.
  8. The budgeting or sub-budgets planned or proposed by the company management and the decentralized planning departments are compared with one another.
  9. An overall report is drawn up.
  10. The overall report is checked by management and the overall budget is approved if necessary.

How do I make sure that my plans, especially the all-important liquidity plans, are as realistic and useful as possible?

Take the time to plan - it's a worthwhile investment

First of all, make sure you understand why they are budgeting. The answer has a big impact on your attitudes and, by extension, the amount of attention you put into the budgeting process. First of all - a budget or, in other words, a financial plan is important for every company. In this context, however, liquidity planning is of essential importance, especially for entrepreneurs. Nobody goes on a hike in unknown areas without a map or a navigation device with them. The budget is the company's route plan through the year. You set goals and make assumptions to get where you want to be as an entrepreneur at the end of the year.

To do this, a EXPERT TIP: If you invest time in drawing up a realistic budget, it will help you to set the priorities in the operational business according to your specifications. In other words, at the fork in the road you will know which way to take. It also makes it easier to determine where you are on the way. In classic corporate management, this is called controlling.

Use the previous year's figures - but only for orientation

A distinction is made between two methods in budgeting. The top-down procedure begins with planning from above and planning is broken down to all organizational units. In contrast, bottom-up planning starts with partial budgets such as sales plan, sales plan or sales plan, production plan, personnel plan, investment plan, liquidity plan based on the organizational units. These sub-budgets are then combined at the top level to form an overall budget. Mostly the sales plan is started. In both budgeting methods, in a first step, in contrast to zero-base budgeting, the values ​​from the previous year are used. These previous year's values ​​are often a good first indication of the expected sales and costs and a hallmark of efficient budgeting. This is often referred to as a base plan. That should then be the starting point for the priorities in the current financial year.

To do this, a EXPERT TIP: On this basis, consider your sales plans, what additional costs you are planning compared to the previous year and what investments you would like to make. This helps with the motivation and also with the coordination of your decisions.

Create realistic plans - it will make a lot of things easier

In addition to operational behavior control, budgets also serve to identify problems and have an early warning function. To do this, it is important that you strive for a realistic budget. Nobody can predict the future, but you can prepare and you usually have experience. Hence, make sure that there is enough information in your plan to easily monitor your business’s key drivers such as sales, costs, and working capital.

To do this, a EXPERT TIP: Follow the 80/20 rule. Invest time in your most important planning positions. If you don't spend so much time on smaller or more insignificant budget items, you can worry more about the sales offensive and its effect on the numbers. Always pay attention to the dependencies. If you want to generate more sales, this usually leads to higher costs, such as more material purchases, external services and more staff, and this should be reflected in the corporate planning.

Involve the right people - together you can get ahead

There is often the prejudice in many companies that budgets are primarily something for controllers with a love of detail, annoying or restrictive when working. Entrepreneurs, managing directors, executives and employees mostly overlook the importance of walking through the company year with a coordinated “hiking map”. This common image is important in order to bring the forces and decisions into the same direction in the various challenges such as climbs, forked paths or river crossings.

To do this, a EXPERT TIP: Planning should always be a team effort. Jointly developed plans have a higher probability of being achieved and automatically lead to a higher level of commitment. The team understands your priorities and you get an insight into the thinking of your employees.

Signs of good operational and strategic budgets

  • Budgets need to be reflected on clearly defined responsibilities
  • Budgets have to be measurable and flexible
  • Budgets must have room for maneuver for the person responsible
  • Budgets have to be realistic - thus challenging and achievable
  • Budgets are team fortunes and not results from ivoryism
  • Budgets are not an end in themselves but provide guidelines for important decisions

Use a support tool - the added value is huge

You should use a software tool for plan development and subsequently for controlling. The accounting system is often used here. However, this has the disadvantage that the entire complexity of the bookkeeping is usually mapped in it and the bookkeeping is primarily designed for the documentation of the past. Corporate management based on accounting is like route planning when driving a car on the basis of motorway toll receipts or fuel receipts and not on the basis of real-time data from a navigation device.

For this our EXPERT TIP: In 2019, budgeting should be done with state-of-the-art support, although Excel is not necessarily one of them. COMMITLY is the flexible, supportive online tool here. COMMITLY makes it easy for you to create, discard and fix plans online and to continuously monitor the achievement of the plan.

False Budgeting Myths - Leave Prejudice to Your Competitors

  • Budgets are out of date - see budgets as navigation devices or hiking maps in digital form. They are used more than ever.
  • Traditional Budgeting processes are time consuming and inefficient - Pragmatism and modern software tools reduce the effort to a minimum and increase the knowledge many times over
  • Taxes are based on budgets once a year - State-of-the-art corporate management is based on real-time data and is part of the company's daily success
  • Set budget targets wrong incentives - Budgets created in teams create responsibility and orientation for managers and employees
  • Budgets stifle innovations in the bud - budgets that are lived show potential and serve as early indicators to do better and differently

Our EXPERT conclusion

Budgeting is an important process for ensuring the vitality of a company. Budgets that are drawn up together are of great value in the operational management of companies. Modern online software tools allow updates at the push of a button, joint creation and processing of plans and support in the implementation of budgets, for example in the form of forecasts. In comparison here, Excel is a relic from the last decade.