What is budgetary management?
The meaning of budgeting, also known as budgetary management, in business accounting is a process of overseeing and tracking income and expenses. Businesses often have budgets for individual departments plus an overall company budget, and managers are frequently responsible for managing the budget for their department. Budgets typically have five aspects:
- Revenue: This is income from sales, investments or other sources. All income should be recorded in the budget, and you should always note whether it’s pre- or post-tax income, so it’s easier for your company’s accounting department to handle business taxes.
- Operating expenses: Operating expenses are the costs associated with running the department or business, such as machinery upkeep, rent and utilities. Some of these expenses are fixed, like insurance and licensing fees, while others are variable, such as marketing or research and development costs.
- Capital expenses: These are capital investments in the department or business. Capital expenses can take many forms, such as a new building or upgrades to an existing facility. Other forms include patents on new products and the development of new technology such as phone apps.
- Employee expenses: These expenses typically comprise a large part of company, department and project management budgets. They include any expenditures related to staffing such as wages, employment taxes and health plans.
- Savings: Just because your department has some extra money to burn doesn’t mean you should allocate it. Holding money back for unexpected expenses, especially when you have a surplus and don’t work with a lose-it-or-use it business, can help you stay prepared for future events.
Within these five categories, managers can expect to forecast expenditures for a year or other predetermined length of time, using business budgets to track expenses and ensure the department or company can cover its costs.
Budgetary management responsibilities
There are two main responsibilities for successful budgetary management, whether you’re outlining revenue and expenses for a department or managing a project. These responsibilities include:
- Preparation: Preparing business budgets properly helps managers stay on track and avoid miscalculations. The process for this portion of budgetary management includes determining expenses, setting spending limits and creating a tracking system.
- Tracking: Budget tracking is an ongoing task in day-to-day business operations. This process 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. This expense may be anything from the necessary replacement of broken machinery to lower-than-expected profits. As a manager, you must account for the unexpected cost by adjusting spending elsewhere to ensure the department doesn’t go into a deficit.
Two approaches to budgetary management
Budgetary management typically involves one of two methods—cash or accrual accounting. Selecting the appropriate style of accounting depends on factors like company size, budgetary management experience and the items on the budget.
- Cash accounting: With this accounting method, revenue is recorded when it appears in the company’s bank account and expenses when they’re paid and funding has left the account.
- Accrual accounting: With accrual accounting, revenue is recorded when it’s earned, but before it’s transferred to the bank account. Expenses are recorded when they’re billed, but before the money leaves the bank account.
Midsize and large corporations tend to use accrual accounting, while smaller companies tend to use cash accounting. Good budgeting management, however, requires that you understand both accounting methods as other companies you work may manage their budgets differently.
Three necessary budget management skills
The right skills can make tracking revenue and expenses much simpler, and new managers can use a variety of skills and resources to quickly become adept at budgetary management. These three skills, in particular, can help make this complex process relatively straightforward.
Preparing business budgets for the coming quarter or year is a vital skill for managers. When preparing either type of budget for business, consider things like your company’s objectives and departmental goals. Begin by identifying overhead costs that must be paid for the department to function. After you’ve figured essential expenses, consider capital investments that might improve the department. Taking the time to prepare a detailed and functional plan can make budgeting management much simpler.
Managers must understand how to analyze the financial health of their departments to make good budgeting decisions. This process can also help track the financial health of your entire organization since profits and losses impact the annual budget of every department in the company. A manager with excellent budget management skills can review financial statements and make informed decisions for their department based on the information they glean.
Financial forecasting is the process of determining how a business or department may perform at a predetermined future time. For the best chances of success, budgetary management must include forecasting, which lays out the results to expect from various company actions. Financial forecasting helps managers know where to invest money in their business budgets and where additional expenses might arise. This cause-and-effect analysis may also help them maintain a balanced budget for the year.
Other budgeting management considerations
Good budgetary management can not only keep your department or project on track, but it can also help your company monitor revenue and expenses for business taxes. Because of this, budgeting management skills are especially important in small to midsize companies that may not have the time or resources to deal with the IRS should something go wrong.
Budgetary management FAQs
Here are some of the most frequently asked questions regarding budgetary management.
Why do businesses need budgeting management?
Business budgets account for all profits and losses incurred by a department or company. Without a document that plans for and tracks income and expenses, your department or business has no way of determining its financial health.
How do you create business budgets?
Business budgets can take several forms. Some managers like to create budgets for business from scratch, usually on a spreadsheet, to help them stay aware of every element included. Others may use templates from colleagues in other departments and simply tweak the categories to match their needs. To prepare a budget, managers must know all their department’s expenses—both operational and capital—as well as anticipated income.
Are there budgetary management tools I can use?
Budgeting management tools are available to assist managers in every step of the process. For example, basic spreadsheet applications can provide a great way to make a new business budget. Some companies offer budgeting services for businesses that can be broken down by department, letting all managers see the overall costs and revenues. For managers new to budgetary management, there are courses and training available online that teach basic and advanced accounting practices.
How can managers use a budget?
Managers can use their budget in a variety of ways, including allocating necessary resources to essential departmental operations or for specific projects. Business budgets are also useful to let internal and external stakeholders know what to expect in the coming year. A budget can inform others of the goals you’re looking to achieve, and can help teams and departments pull together to make them happen. Additionally, budgets can assist with gauging the performance of individual employees and teams and provide valuable insight into the fiscal health of the company.