How much time it takes you to prepare and have a budget approved is a reflection of the efficiency of your budgeting process. Usually, a faster cycle time translates into less strain on operation units, systems, and human resources. In such a case, you can concentrate more on the growth and improvement of your business as opposed to wasting time exploring what measures you will use to judge your business’ performance. It is easy to get frustrated when it comes to the budgeting process, especially if you confuse the process for what it is not. Understanding what a budget is, and what it is not will help you have a seamless budgeting cycle time.
Differences Between Budget, Financial Plan, and Forecast
Over the years, there have been concerns to do away with budgeting in an organization. Nevertheless, budgeting is still essential, and you mustn’t confuse it with other financial metrics. A budget describes the process of allocating money to various activities that an organization has committed to itself. The significance of a budgeting process is that it controls costs and avoids scope creep.
A budget is different from a financial forecast in that a forecast analyzes a company’s financial future, making some assumptions. Similarly, a budget is different from a financial plan because, unlike the budgeting process, financial planning involves a series of actions or activities that a company intends to carry out within a given time. Generally, the budget process qualifies as a control metric through which an organization allocates funds aimed at achieving set organizational goals and objectives.
Reasons Why An Effective Budgeting Process Is Important
Budget cycle time is considered to be a proxy for well documented procures and policies for minimizing the challenges that can be expected within a given cycle. If your company’s cycle takes more than five revision rounds and over 60 days to be approved, it is an indication that you need a financial transformation in the company. As such, it is important to put much effort into the budget preparation process. Budgeting is significant in any business for the following reasons:
- Helps in actual operations’ planning: with proper budgeting, you get to know what conditions to expect in the future as well as the necessary measures to address them.
- Aids in the coordination of the organization’s activities: budgeting will help you understand how all the activities in the organization relate and how various departmental personnel supports the company’s goals.
- Communicates organizational plans to the appropriate individuals: an organization’s goals and objectives can never be achieved without the awareness of all the right teams. Since the budgeting process touches on various departments, it serves as a communication of the various activities and actions needed of each person in the organization.
- Evaluates organizational performance: while the main aim of budgeting is controlling activities within an organization, an effective budgeting process sets measures to evaluate an organization’s performance in terms of meeting set targets.
What Should Be Your Budget Cycle Time?
Cycle time refers to the number of days, inclusive of weekends, that you will need to complete your company’s annual budget. Your budget cycle time depends entirely on the budget iterations. According to a report by APQC, most leading organizations will have at most four iterations, while slower ones can have at least eight budget iterations. Just as the iterations differ, various companies have different budget cycle time. The majority of the leading companies can have a maximum of 25 days of budget cycle time, while slower performers will require at least two months to finish the budget process. Irrespective of your performance, it is advisable you work towards reducing your company’s budget cycle time.
Reasons For A Longer Budget Cycle Time?
Depending on the specific roles and complexity of the budget in your organization, the cycle time will vary. If your company follows the negotiation route, the chances are high that the cycle time might take longer. In such a case, the plan has to be approved before funds are allocated, and the back and forth process might take longer. While this process may have numerous iterations, it is a necessary step as it requires full acceptance of the performance level.
Uncertainty in the actions and activities to be funded also accounts for longer cycle times. Given the fact that the future is increasingly uncertain, you must take enough time to account for any prospective uncertainties that might affect your business adversely. For instance, your budget should have room for future issues such as geopolitical instability and globalization effects. In most cases, the preparation and approval process takes an extended time because it is hard to quantify such elements.
Proper budgeting is vital for the success of any organization. While there is no one-size-fits-all practice for improving budget cycle time, you must consider the specific issues that influence the budgeting process in your company. For instance, involve all the necessary individuals in setting goals and expectations, understand that you can shift goals relative to your targets, and always work towards a compressed cycle time.