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Budgeting and Planning: What You Need to Know

January 24, 2020 |

A business is in constant motion, and its executives are constantly planning how to be profitable—either in their heads or in formal budgets and plans. Intentional planning and budgeting is important for making sense of what’s going on in an organization so teams can anticipate and respond to any situation. But incorporating planning and budgeting into your business cycle also requires precious time and resources. 

That means some business leaders might not want to take the time to formalize their plans or allocate the necessary resources—because, mistakenly, they think those activities are wasteful when they already have their plans plotted out in their minds. But the fact is, planning and budgeting have many facets, and not understanding and formalizing the processes can lead to costly mistakes. It’s vital to arm yourself with an understanding of budgeting and planning before any catastrophic events derail your business.

What are Planning and Budgeting?

Planning and budgeting are the processes that identify, develop, monitor and achieve business objectives, and enable and allocate appropriate resources—financial, human and time—to that end.

In other words, the key functions of planning and budgeting enable you to:

What’s the Difference Between Planning and Budgeting?

Planning and budgeting are often used interchangeably. Although they often overlap, there are differences.

Assuming the organization has identified some overarching goals, planning involves developing objectives, setting timelines, adopting key performance indicators (KPIs) and assigning accountability to the appropriate people and departments. Planning tends to be for the long term, reaching three years or more.

Budgeting, on the other hand, aligns business activities with business objectives. Employees are tasked with figuring out how much needs to be spent on operating the business, and where the revenues and cash flows will come from to cover expenses, while still being able to invest back into the business so it can continue to grow. Through this budgeting process, you allocate the resources necessary to execute your plan, which usually covers the upcoming year and three to five years thereafter.

What are the Benefits of Planning and Budgeting?

When organizations don’t plan and budget, it’s like traveling without a roadmap or GPS as you blunder along to find your directions. Likewise, planning and budgeting help to chart the way to a profitable business—with a myriad of other benefits along the way.

Benefits of Planning

Effective planning allows you to:

Benefits of Budgeting

Effective budgeting allows you to:

How to Create a Budget Plan

Creating a budget doesn’t need to be a difficult exercise if it’s part of the organization’s annual cycle. It’s common practice to prepare a budget for the upcoming fiscal year and to update it as the year progresses. These ongoing revisions produce fixed and/or rolling forecasts depending on the company’s needs.

Want to learn how to build a better budget in five minutes? Check out our infographic 5 Budgeting Best Practices You Need To Start Using Today, and take the first steps to reducing costs and driving growth.

What to Include in a Budget

What you include in a budget will vary somewhat, depending on the type of business you’re engaged in. Without being industry specific, typically, a budget should include the following:

Key Steps to Create a Budget

The budget process should be included in an organization’s annual business cycle, and it’s necessary to set aside time and resources to create the budget. Normally produced once for the next fiscal year, it may be updated on an ongoing basis as required. As the business grows, some companies also produce multi-year budgets.

When creating a budget, always involve the appropriate staff and follow these key steps:

  1. Review and understand all the components of a budget (see the list above on what you should include)
  2. Pull up historical data, where available, for each of the revenue and expense components
  3. Include staff who are responsible for generating sales or selling, those who are in charge of spending and those in charge of tracking inflows and outflows
  4. You may use the previous year’s budget, if available, as a guide, but not to replicate
  5. Estimate the revenues for each fiscal month and year
  6. Estimate the expenses for each fiscal month and year
  7. Determine what, if any, capital expenditures are required for the budget year and the next few years
  8. Review the budget and start to look at the bigger picture like investing and divesting activities, e.g., major acquisitions and dispositions, and financing activities including adding or reducing debt and equity
  9. Prepare financial statements—balance sheet, income statement and cash flows—using the budgeted data
  10. Produce KPIs and other ratios to see how the budgeted results stack up against previous years and against anticipated changes in market conditions

Are you ready to build a modern budget? Set KPIs, leverage state-of-the-art automation and even eliminate your static budget altogether with the free eBook 5 Steps to Better, Modern, Budgeting: The Must-Read Guide.

How to Review, Maintain and Update a Budget

A budget is useful only if it is reviewed, maintained and updated. Remember:

  1. As the year progresses, monitor the business against the budget using reports and analytics.
  2. Based on these reviews, proactively make changes to your business plans and tactics to ensure that you meet your budgeted outcomes.
  3. Some organizations prefer to have a set number of times, e.g., quarterly, when they combine the year-to-date (YTD) results with the remaining updated budget for the year, to derive a forecast for that year’s results.
  4. Other organizations may use a rolling forecast model where the budget is constantly updated and combined with YTD results to project four or more quarters out into the future.
  5. Whichever model you use, start with your latest YTD results, which will replace the budget for the same period, then add the remaining budget for the year.
  6. Review the combined results, adjusting the budget as required.
  7. Benchmark these results against your KPIs and determine what you need to do to achieve the organization’s objectives.
  8. Update the future years’ budgets if applicable.
  9. Reviewing and updating the budget and forecast will be much easier and less time-consuming if done with the aid of budgeting and planning software.

Budgeting and Planning Software

It’s easy to become overwhelmed when you’re dealing with numerous and complex data. With the help of software applications, modern-day organizations don’t need to be held back from speedy and effective budgeting and planning cycles—but many don’t leverage the power of automation.

For most finance and accounting professionals, Excel is an indispensable tool. With expert usage and proper planning, Excel can overcome many of the problems mentioned above. At a basic level, it’s easy to use and can produce spreadsheets, reports and all kinds of calculations rapidly. 

Approximately one third of companies continue to produce standalone spreadsheets for account reconciliation, supporting calculations, currency conversions and even comments. Excel is the program of choice for these activities. This may be good enough for smaller companies, but as your organization grows, Excel alone cannot keep pace with the growth.

American Health Partners eliminated days of budgeting and planning and rolled out a 12-month rolling forecast, positioning their operations team for success. 

The Next Generation of Budgeting and Planning Software

Fortunately, there are solutions available that can do the heavy lifting of automating and integrating data collection and manual processes like workflows during the creation process. Thus you are freed to perform meaningful and value-added work.

But can you replace Excel? And, more importantly, should you replace Excel? 

Ask any information system professional who has tried to take away Excel as a budgeting or planning tool from users, and they’ll likely tell you how impossible a task it is. And yet, Excel on its own produces results that are only as good as the user is. If the user has bad habits, you could potentially have an error-ridden file. Also, each time you need to create a new version of a file, there is no proper tracking mechanism. Most Excel users will attest to the frustrations of saving over the latest version, or updating an outdated one unwittingly.

The best solution is budgeting and planning software that integrates all the benefits of a modern cloud solution without ever having to leave Excel. If you could have an application that works with Excel in automating workflows for routing and approving, controlling versions and keeping audit trails, wouldn’t you want it? An Excel-based solution will lead to higher adoption rates and a much easier learning curve. 

If budgeting and planning are critical to an organization’s success, it’s best to use a tool that delivers more timely and efficient results. Most importantly, you’ll always have a single version of the truth for the entire organization. No more multiple versions of the same file in various databases and users’ directories. No more wondering who’s approving and when, and which is the approved version. Don’t spend all your time planning and budgeting when you can prepare and revise your plans quickly. Free yourself to focus on the important business of running the business.

If you  want to learn more about how you can turn Excel into a more powerful tool for your finance team, read our free guide Excel For The Win: A Finance Guide for Spreadsheet Believers.

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