Traditionally, companies have used an annual budget to track expenses and predict revenue. Here are some key benefits of strategic budgeting: Increases success of long-term projects For instance, if you petition higher-level management to fund a new marketing campaign, you can increase the chances of approval by highlighting how it would contribute to the company's overall growth. Even if you're not directly responsible for creating an organization's budget, learning about strategic budgeting can help you advocate for your department's funding. Understanding how to track expenses in terms of the company's overarching goals allows you to increase revenue. Strategic budgeting is one of the most basic principles for an organization's accountant or financial officer. Related: What Are Budgeting Risks? (Plus 5 Ways To Limit Them) Why understanding strategic budgeting is important The company uses this tool to allocate resources to different departments and manage potential risks of taking on such ambitious projects. It's likely for these projects to take longer than a year to produce adequate results, making a strategic budget appropriate. For instance, a company might want to develop a new geographic market or introduce a new product line. Strategic budgets usually span more than one year and align with the organization's long-term goals. Finally, one might only authorize expenditures if there is funding left in the budget to do so.A strategic budget is a long-term spending plan that helps an organization manage its expenses. Another option is to pay bonuses based on compliance with the budget. One approach is to report budget versus actual variances to management, so that the largest negative variances are investigated. Once a budget model has been completed, it is then used to control the operations of a business. Once all parties are satisfied with the budget model, the board of directors signs off on it and the accounting department loads it into the accounting software, resulting in budget versus actual financial statements.įinancial Forecasting and Modeling How to Use a Budget These mandates necessitate a series of revisions by those managers who create the model. These managers will likely mandate changes to the model, such as adjustments in capital expenditures or expense levels. As budget segments are returned by managers, the segments are aggregated into a master budget model, which is then reviewed by senior management. The person in charge of the budget then provides support to these managers as they adjust the supplied budget model.Īggregate and revise the model. Issue the preliminary budget model, with policies, procedures, and milestone dates, to the responsible managers. Managers can then focus their attention on the more critical changes to the budget model. The estimated budget is based on historical results, adjusted for inflation. In some cases, it is more efficient to supply managers with a preliminary budget model that already contains an estimated budget. This documentation is needed to give direction to those managers involved in the creation of the budget. Specific due dates are needed to ensure that the management team creates their respective portions of the budget on a timely basis, so that these pieces can be rolled into the main budget model.Ĭreate budgeting policies and procedures. This step is needed to set the general direction of the plan, such as to add a new product line or to terminate a subsidiary.Ĭreate a calendar of budgetary milestones. Obtain strategic direction from the board of directors. This is accomplished by engaging in the following tasks, which are presented in their approximate order: The first step in budgetary planning is to construct a budget. The purpose of budgetary planning is to mitigate the risk that an organization's financial results will be worse than expected. Budgetary planning is the process of constructing a budget and then utilizing it to control the operations of a business.
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