The Importance Of Budgeting

Almost all well-run businesses and organizations prepare budgets at least annually. Unfortunately, very often, the budget process becomes more of a formality, required process, or activity, than a useful document. While budgets should be part of a careful and detailed process and analysis of a businesses or organizations needs, and how to get there, it is much more common that the budget is merely a "bunch of numbers" that "have to be" prepared, than anything useful. "Let's just prepare it and get it passed" is an often stated opinion. "It doesn't really matter, because we'll just change it if we need to anyway," is repeated ad nauseum, making the entire process little more than a waste of time and energy.

Dictionary.com defines "budget" as an "estimate of expected income and expenses, and when used as a "verb (used with object)," as "to allot (money, time, etc.). However, the definition does not detail the important functions that a properly prepared budget can and will provide. Budgets should not be merely a bunch of meaningless numbers that have been thrown together to prepare the document. Only if a budget has been prepared utilizing "zero based budgeting" does a budget reach its full potential.

When either preparing or reviewing a budget, first carefully review the income (or revenue) side. How has each line item been calculated? How does each number compared with the actual for each of the last three years? What methods, techniques, or "revenue growers" are to be used in this upcoming cycle? It is important to recognize, when one prepares a budget, to be very conservative with revenue or income estimates and projections, and very aggressive in calculating expenses.

Expense items need to be reviewed very carefully, item by item. Commonly, businesses or organizations use the "previous budget plus" concept, which means it simply takes what was spent (or even worse, projected to be spent) in the previous budget cycle, and a specified percentage is simply added across the board to most expense items. When budgets are prepared this way, they are truly the waste of time and effort mentioned above. However, when each item is analyzed on a "needs" and "effectiveness" basis, one often realizes that monies are expended in many areas that do not provide the required result, while in other areas, more funds may need to be spent. One then also develops the philosophy of "thinking outside the box," and developing creative methods to more effectively spend funds, or "get more bang for the buck." One using this method develops an important document that guides decision making, as well as provides direction. A properly prepared budget should not be revised during its cycle, unless there is some sort of emergency or other form of extraordinary circumstance.

Budgets should always include at least one realistic reserve fund. The reserve fund may be exclusively for unanticipated maintenance and repairs, or for some other unanticipated need. When budgets do not include reserves, they almost invariably need to be tweaked and readjusted during the cycle, thus weakening the intended and important purpose of a properly prepared budget.

Anyone who reviews a budget should ask a lot of questions, and request a detailed budget, as opposed to merely a summary budget. Some of these include; 1) What items make up that line item, and how are they broken down? 2) What alternatives were considered in this area? 3) Have we evaluated alternatives regarding utilities and telephone, etc.? 4) Which program worked the most effectively and why? 5) How do we market, and why do we market the way we do?

The above are simply a sample of some worthwhile questions. The most important thing to do is always ask questions about anything that you do not find clear. Do not be embarrassed - - chances are if you find something confusing, so will others.

Budgets can be the most important process used by a business or organization, or simply an exercise. Each of us owe it to anything we believe in, to explore all alternatives and possibilities. Many nay-sayers like to state that "It's only a small amount. It won't amount to anything- it's not large enough." Nothing could be further from the truth. Budgets are refined by making many small adjustments in multiple areas. You'd be amazed how much the total of all these adjustments add up to. Think of the adage, "You know how you eat an elephant - - one bite at a time!"