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Understanding the Importance of Budget in Business

Wednesday December 12, 2012 , 3 min Read

CFOs should play a lead role in defining the organizations budget keeping in mind internal factors like long to mid-term and short term business goals as well as external factors like economic indicators, industry dynamics and the overall business climate.

The budgeting processes can be done through a top down or bottom up approach. It is important that the CFO plays a role of capital efficiency builder in the budgeting exercise.

While budget is an annual exercise, it should have following features to act as a robust guide to control financial tools for the period. Here are some essentials to keep in mind.

-         Annual budget should be further broken into four quarterly budgets so that it can be converted into quarterly rolling forecast later on. This should be done keeping in mind the cycle of business in a financial year. An effective budgeting dashboard should also have sensitivity build into it on key figures to absorb the dynamics of doing business. Deviations from budget versus actual in all areas of revenue versus expenses should be a key but important feature of any budgetary framework. This helps to better analyze assumptions which can be later used to strengthen annual budgetary process.

-         Budget should be able to quantify business opportunities, challenges and provide an effective map for navigating those challenges and converting them into financial plan for effective cash flow management.

-         Preparation of budget documents should be looked as an annual collaborative exercise among operating business units head, support functions and sales/marketing head, so that it is easy to prepare and administer. As the lead responsible unit for this exercise, the CFO should create comprehensive documentation & process calendar and implement this platform with the help of IT/ERP tools efficiently in order to gather data from its internal financial and operational IT systems.

-         While drawing the annual budget, it is very important to incorporate business strategy as discussed by the management. Keeping the company’s long term strategy in mind, provisions should be made to achieve them within the available financial and non-financial resources based on the annual budget.

-         The financial controller should understand the business model of the organisation clearly and giving direction to all business unit/sales & support function to lay down key benchmarks on EBIDTA/Capex and cash flow requirement of the organsiation. The CEO or sales head should direct the revenue trend with a top down approach.

-         The budgeting exercise brings all stakeholders including board of the Company on single platform and CFO plays a lead role in terms of influencing decisions. He also acts as an independent advisor to bring realistic and achievable financial goals keeping in mind operational/marketing constraints.

About the author:

Sanjay Gaggar is a qualified CA and CS with an experience of 18+ years in diverse management, finance & business functions. He is also the founding partner of iXCFO