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A budget and the budgeting process Essay Sample

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A budget and the budgeting process Essay Sample

A “budget” is a “financial plan reflecting the business strategy and represents a more structured way of communicating it to the team”. The process by which a budget is built and agreed within an organization is called “budgeting process” or “budgeting cycle”, that represents one of the most important financial planning tools. “This cycle always starts with a vision or a goal, based on which the approach to be used is chosen. The next step is the elaboration of the budget itself by allocating the right resources into the right place. It is very important to keep track of it (the sooner a variance is spotted, the better, as more time is available to understand it). The last stage is the evaluation process which should lead to future improvements”. (ILM, 2017 Good Practise, What is a Budget?).

To explain it in more details:
The first step in the “budgeting process” is to have a “strategic plan”, a “written plan that outlines how the organization will achieve its mission and vision successfully and ensures that the resources are efficiently used to support the strategy. To implement this plan, business goals need to be considered when agreeing on the budget as they are by it funded”.
(https://thethrivingsmallbusiness.com/budgeting-process).
The second step is to decide what budgeting method to use between “Incremental budgeting” & “Zero Based Budgeting”, considering that both have advantages and disadvantages.

An “Incremental budget” is a “budget prepared using the previous year’s budget as a basis with incremental amounts added for the new one. These adjustments will be due to pay raises, inflation or changes in business activity. Its advantage is that it is a system relatively simple to operate, easy to understand, stable and change is gradual. The disadvantage is that it does not consider the changes in the economic environment. Also, it does not incentive the development of new ideas and cost reduction”.

(https://www.tutor2u.net/business/reference/budgeting-methods-incremental-budgeting).
A “zero-based budget” is “a method of budgeting that starts from a “zero-base” and all expenses must be justified for each new period. Its advantage is that pushes team members to analyze the past and future performances, making sure that inefficiencies are not carried forward. Its disadvantages are that it is time-consuming and requires deep knowledge”.

(http://www.investopedia.com/terms/z/zbb.asp).
The third step involves building the budget itself by projecting the revenues, fixed & variable costs, annual goal expenses. Furthermore, the targeted profit margin has to be established and considered in order to allow returns for business owners or investors.

As explained by Larry M. Walther, the above steps require a debate to determine the direction of the business. The reason why a budgeting committee is created that includes senior-level personnel of each unit of the organization. The members of this committee are involved throughout the budgeting process. They provide the information relative to their own unit. The information is then compiled together and passed through the organization till an overall budget is obtained. The budgeting construction and agreement normally follow the organizational chart. However, different organizations use different approaches. The two basic ones are Top-down (Mandated budgets) or Bottom-up (Participative budgets).

“Top-down budgeting” can be defined as “an approach in which the upper management makes a key decision about company expenditure without input from middle managers or lower level employees”.

Instead, “Bottom-up budgeting” can be defined as “an approach in which managers and employees prepare budgets for their individual departments. Upper-level managers & Executives review these budgets for approval. A final organizational budget is prepared by consolidating all the agreed individual department budgets”. (Definitions are taken from http://www.ehow.com/info_8792659_advantages-bottom-up-budgeting.html).

The Bottom-up approach fits better modern and dynamics organizations like hotels. It makes the budgets more realistic as they are set by employees that have better knowledge of their own departments and provide more accurate information.

In the hotel I work for, two yearly budgets are elaborated: the Capital one that relates to the Capital Expenditure or Capex and the operating one that relates to the normal day to day operation of the hotel.
Our Budgeting process starts in May of the previous year and uses a Bottom-Up approach and an Incremental method (never Top-down & zero-based budgeting).

Firstly, a meeting takes place and it is attended by all the personnel (usually Head of Departments) that is involved with the budgeting process in which the plans for the following year are presented and guidelines given by our Corporate Office are shared and discussed. Afterward, the Finance Department provides each Head of Department with Excel worksheets and instructions in order to assist with the preparation of the Departmental budget.

The Head of Departments (with the support of these worksheets) builds their figures for the following year. By using the incremental method, they will consider the previous years result in figures and adjust them accordingly based on different factors such as changes in strategy/objectives, changes in the economic environment. For example, to project the cost of Lobby Decorations for 2018, it was necessary to look at their cost in 2017 as a starting point, but at the same time, it was very important considering that the Florist was about to be changed and the flowers’ price was going to increase considerably.

Subsequently, the HODs present their departmental budgets to the Executive Officer of their division, that adds his inputs and passes it to the Director of Finance. The Director of Finance reviews it and passes it to the Hotel/General Manager for further review. The process continues with the budget going back and forth between HODs, Director of Finance, Hotel /General Manager until the different departmental budget is agreed upon and unified in a final draft. Amendments and corrections are discussed during meetings and then applied. The final draft is submitted to the Regional Office for final review and approval in September. Once, it is agreed regionally, the budget becomes official.

It remains a responsibility of the management involved in the budgeting process to monitor the performance of the agreed budget by reviewing it on a monthly basis.

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