Budgets and Budget Cycles: How Long is Long Enough?


It goes without saying that a business can’t operate without a solid budget; the budget sets clear goals of income and expenditure for the entire body of the business, from top to bottom. There are many factors that go into determining your budget cycle length and the frequency of creating a new budget, and these factors have to be weighed well to allow for the creation and execution of a well-balanced budget. First, we’ll discuss the breakdown of the budget cycle and some of the problems that often crop up during this cycle.

The Budget Cycle

The Typical Steps of a Budget Cycle

Preparation

The first step of the budget cycle, it may seem redundant to say, is to prepare a budget. Depending on the size of your business, the challenges may vary in size and difficulty. Too often, it seems, communication between departments during budget planning falls short, resulting in frustration and arguments which end up delaying the budgetary process. We call this fragmentation, and find that it is often the result of not sharing individual information between departments in a timely manner.

One solution we’ve discovered is to create and maintain “one version of the truth.” That is, a centrally located set of tools or software that contain all of the information for every department. This file contains all the necessary reports, forecasts, and audits, and can be found, commented on, and discussed by anyone who is granted access to it. This allows your business to maintain a much more real-time conversation about the budget, the needs of each section of the business, and come to a cohesive budgetary vision more quickly.

Naturally, this becomes even more important for larger businesses with more departments and individual budgets to consider. Smaller businesses operating on one budget would still benefit from maintaining a central location for all of their information, year-to-year, especially in the digital age, for ease of access and review. Once you have a budget that you think you’re happy with, next up is getting it approved.

Approval

Unless you’re the sole decider of your budget – and then even sometimes if you are – even the most perfectly prepared budget can be a challenge to approve. Balancing out every tiny little piece and making everyone as happy as possible while staying within the means of your company can be a real challenge.

Once again, we find that many of the problems – at least internally – with approving a budget stem from poor communication. From the perspective of a department head requesting a new copier, it is easier to understand being told no if you can see the budget as a whole inside the central software and see that there just isn’t room for it. Additionally, successive iterations of the budget are far easier to spread around the office through these toolsets. An approved budget just needs to be put into action.

Execution

Execution, for the most part, is the easiest of all the steps of the budget cycle. It can also be one of the most trying, as the company begins spending money and the theoretical funds discussed as numbers become dollars, cents, and check after check signed and delivered. Was enough budgeted for this? Were costs predicted correctly? Was there enough money set aside for miscellaneous and unexpected expenses? Will this budget turn a profit?

More than any other step in the process, executing a budget can bring about questions on the length of a budget cycle. Sticking a company into a budget for too long a term can hinder its capability to change and react to more current problems and situations, while creating a short budget cycle may be unnecessary or create a lot of work that isn’t needed, wasting man hours and more valuable resources. One way or the other, once a budget is executed, the only thing left to do is determine if it was successful or not.

Auditing and Evaluation

Arguably the most important part of the budget cycle is the aftermath: auditing what was done and evaluating whether or not it was successful. While this post won’t go into full detail on the methods of evaluation, as that would be—and has been—a tome in itself, it is important to note the significant role, once again, that centralized data and software that manages it plays in the process, and in the decision as to how long the cycle should be.

Having the entirety of the company’s data together in one place with one unified toolbox of software and analysis tools—something besides your standard spreadsheet, that is—that allows for easy compilation, reorganization, and manipulation of the data is absolutely essential. Not only will this streamline the process of determining how effective the budget was, but it will allow the company to change the timing of their budget cycle easily and effectively.

Realistically, there are several viable options for these toolkits and software packages out there (such as IBM’s Financial Performance Management), and what is most important is the implementation of these packages: ensuring that your company is well-versed in their use and all of the phenomenal versatility that they bring to the table. Not only do data tools make analysis of budget cycles smoother and easier, they allow a far simpler transition between lengths of budget cycles. That means a company can realistically adjust the timing of their budget in a more practical manner, moving from shorter to longer or vice versa as their income and analysis demands. Data software and analysis tools can make or break the budgeting process for a business of any size, and can define their success in an age of continual technological advancement.