Categorized | Advice

The ABCs of Budgeting

Posted on 29 August 2012

Even if you’re not an accountant, knowing how to prepare and maintain budgets will add value to your resume. Taking time now to know the ABCs of budgets should make you more marketable in the future.

Budgeting is an important tool used by management to control a company’s cash flows. According to investment banker Andy Lazarus of CIBC World Markets, reviewing a company’s budgets and forecasts is a key step whenever his company is analyzing a company for a deal. “Budgets should be set with worthy goals, and should always be realistic and attainable,” Lazarus advises.

Budgeting is so crucial to doing business that, chances are, your job description already includes some aspect of budgeting. What if there are no budgets in place–and you’ve managed to graduate without taking a single accounting class?

The secret to budgeting variable costs is to determine what causes these costs to fluctuate.

Here are a few budget basics to keep in mind.

Set Realistic Goals
Top-level managers use departmental budgets to control spending without having to oversee each and every expense. As a result, executives expect departmental managers to prepare and maintain their own budgets; department heads assign budget management to their underlings.

How Does the Department Fit In?
When managers prepare their budgets, they first determine inflows, which depends on whether their department is a cost center or a profit center. A department that provides administrative support, such as human resources or accounting, is considered a cost center. In that case, determining the projected inflows is as simple as asking upper management how much money has been allocated to the department.

Figuring out the inflows of a profit center is much more difficult. Unlike cost centers, profit centers bring in money by selling products or services. Since the department’s inflows will fluctuate, projecting the department’s revenues requires considerable thought and effort.

Analyze a History of Expenses
Now comes the fun part: spending an employer’s money. To determine this aspect of the budget, managers analyze expenditures during the previous three or four years. Once they’ve digested the historical data, they begin budgeting the current year’s expenditures in terms of fixed costs and variable costs.

Fixed Costs Don’t Fluctuate
Certain costs, such as rent and management salaries, don’t change much during the year. When forecasting a department’s expenditures, it helps to figure out how much will be spent on each of the department’s fixed costs each month. Then managers can project the remainder of their department’s costs. These costs, known as variable costs, fluctuate in relation to a department’s inflows and include staff hours, units of products sold, or miles driven. The secret to budgeting variable costs is to determine what causes these costs to fluctuate.

Use a Year-Round Budget
Managers periodically compare a department’s actual inflows and outflows to their budget, and make adjustments as needed. Most professionals agree that, to be a useful tool, budgets should be reviewed and updated either monthly or quarterly.

To learn about budgeting, consider taking one or more courses on this topic offered through local universities, adult education centers, or online seminars. And don’t overlook the information and templates available over the Internet. If you prefer to teach yourself new skills, there are many books about budgeting available on and elsewhere.

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