Budget Management: Three Skills Essential for New Managers

Successful businesses track their profits and costs. Often, departmental managers are responsible for managing portions of the company’s budget. New managers may not have training in how to effectively manage a departmental budget, so they must develop the necessary skills. Learn what budgetary management is, see examples, two approaches to budgeting, three necessary skills and some frequently asked questions. 

 

Quick navigation:

  • What is budgetary management? 
  • Examples of budgetary management
  • Two approaches to budgetary management
  • Three necessary skills for managing a budget
  • Budgetary management FAQs

 

Related: How to Manage Employees

 

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What is budgetary management?

Budgetary management is the process of managing and tracking income and expenses. Companies often have budgets for individual departments as well as an overall company budget. Departmental managers are frequently responsible for managing their department’s budget. New managers can use a variety of skills and resources to quickly become adept at budgetary management. 

Budgets often have four aspects:

  • Revenue: Revenue is income from sales, investments or other sources. All income should be recorded in the budget.
  • Operating expenses: Operating expenses are the costs associated with running the department or business like machinery upkeep, rent and utilities.
  • Capital expenses: Capital expenses are investments in the department or business. Capital expenses can take many forms such as a new building or a patent on a product. 
  • Employee expenses: Employee expenses include any costs related to staffing such as wages and healthcare. 

Within these four categories, managers can expect to forecast expenses for a year or other predetermined length of time and track expenses to make sure the department or company can cover its costs. 

Related: How to Create a Budget in 7 Steps

 

Examples of budgetary management

There are two main responsibilities for successful budgetary management: 

  • Budget preparation: Preparing a budget includes determining expenses, setting spending limits and creating a tracking system. 
  • Budget tracking: Budget tracking includes keeping a running list of all expenses and income to balance the department’s actual money against costs. 

An example of budgetary management would be accounting for an unexpected expense in the department’s budgetary tracker. An unexpected expense could be anything from the necessary replacement of broken machinery to lower-than-expected profits. The manager must account for the unexpected cost in the budget by adjusting spending elsewhere to make sure the department does not go into a deficit. 

Related: How to Create a Performance Improvement Plan

 

Two approaches to budgetary management

Budgetary management can be done through cash accounting or accrual accounting. Selecting the appropriate style of accounting will depend on factors like company size, budgetary management experience and the items on the budget. 

  • Cash accounting: Cash accounting records revenue when it appears in the bank account and expenses when they are paid and the money has left the bank account.
  • Accrual accounting: Accrual accounting records revenue when it is earned but before it is transferred to the bank account and expenses when they are billed but before the money exits the bank account.

Mid-size and large corporations tend to use accrual accounting while smaller companies tend to use cash accounting. It is important to understand how both work, however, as companies with whom you work may manage their budgets differently. 

 

Three necessary skills for managing a budget

Many skills make managing a budget easier. These three skills, in particular, make the complex task of budgetary management straightforward.

 

Budget preparation

Preparing a budget for the coming year is a vital skill for managers. When preparing your annual budget, consider things like business objectives and departmental goals. Begin by identifying overhead costs that must be paid for the department to function. Then you can consider capital investments that could improve the department. Taking the time to prepare a detailed and functional budget will make its management much simpler. 

 

Financial analysis

Managers must understand how to analyze the financial health of their department, and possibly the entire organization. Profits and losses will impact the annual budget. An excellent budgetary manager can review financial statements and make informed decisions for their budget based on the information they find. 

 

Financial forecasting

Financial forecasting is the process of determining how a business or department will perform at a predetermined future time. Budgetary management must include financial forecasting. Great managers use financial forecasting to determine where they should invest money and where they should expect additional costs. This will help them maintain a balanced budget for the year. 

 

Budgetary management FAQs

Here are some of the most frequently asked questions regarding budgetary management.

 

Why do I need a budget?

Budgets account for all profits and losses incurred by a department or company. Without a document that plans for and tracks income and expenses, you will have no way of determining your department or company’s financial health. 

 

How do I make a budget? 

Budgets can take several forms. Some managers like to create budgets from scratch, usually on a spreadsheet, so that they are aware of every element included. Others are provided with templates from colleagues in other departments. These managers simply tweak the categories to match their department’s needs. To prepare a budget, managers must know all of their department’s expenses, both operational and capital, as well as anticipated income. 

 

Are there budgeting tools I can use? 

Budgeting tools are available to assist managers in every step of the budgeting process. Spreadsheet applications are a great way to make a new budget. Some companies offer budgeting services for businesses that can be broken down by department so that all managers can see the overall costs and revenues. For those managers new to budgetary management, there are courses and training available online to learn basic and advanced accounting practices.

 

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