Different businesses have completely different corporate structures. Some of them are multi-product and multi-divisional enterprises, while others are more like a one-man show. Regardless of that, the financial planning process has similar steps, only the scale and the number of people involved varies. This article summarizes budgeting process organization tips from our experts.
Based on our experience with several hundred clients we have summarized it with the flowchart for the corporate budgeting process.
Budgeting process organization flowchart
Goals & Assumptions
The budgeting process organization starts with goal setting. This is the part of the process that people so often omit and forget, although they definitely shouldn’t. During this step you should define what do you expect from the company – high level of profits, great dividend payout rate or a super-normal growth rate.
During the next step you should define the main assumptions about the next year. What is the state of the economy in the world and in your country going to be? What the inflation rates and currency exchange rates will be? Will there be any new business expansion projects undertaken by the company, etc.?
Planning and Consolidation
After that the planning process per se starts. Sales projections and costs forecasting might happen simultaneously, especially if the company has various departments and different people are responsible for each part of the budget. It is a good idea to use one of our budget templates that is specifically created for your industry.
The next step is the consolidation process. In simple words, during this step you have to put together projected income and costs together to reach the goals of the budget. This part of the process is by far the trickiest and the most important. During this step it is necessary to understand:
- What are the most important assumptions behind the budget (sensitivity analysis) and
- What are the different paths for development of the company’s business during the next year (scenario analysis)?
During the evaluation process the company’s governing body reviews the budget created by the finance department. In a small company the business owner is usually both creating the budget and also evaluating and reviewing it. In such cases the evaluation process is actually very much integrated with the consolidation process.
After the review the process is very simple. The company’s management either:
- Rejects the budget and sends it for re-consolidation to the finance department, or
- Accepts it send to corresponding company’s departments for execution.
During the course of the year, it is very important to keep track of the budget performance to quickly notice any discrepancies. Sometimes, in case of very large discrepancies, companies re-plan the budget completely during the year. Other companies have a policy to quarterly aligning the budget plan with the actual results.
We will cover each of the steps of the budgeting process organization in some of our next blog posts. We will give the most attention to the planning and the consolidation parts of the budgeting process, of course. Stay tuned!