Budgeting is more than just putting numbers into your spreadsheet after you have made your business plan. It is definitely not an activity to be done only for a few days and then totally ignored later. Instead, it should be part of a continuing planning process that constantly monitors and measures all of the business functions.
A good budgeting system is one that gets everyone in the organization involved in the budgeting process— from the business owner and key people all the way down to the employees. This is because budgeting is a very important part of goal-setting for the business.
The process can eliminate a lot of confusion and misunderstanding in the organization. It can also effectively impart the entrepreneur’s business goals and vision to the employees and provide them with a vehicle for voicing their concerns and sentiments about those goals and vision. Indeed, the participation of the employees in the budgeting process could help ensure the acceptance of those goals and vision and eliminate any pockets of resistance to them.
Once a budget is approved, you should make sure that it is immediately put to use. In particular, you can use it to analyze your financials. This is the evaluation of a particular business function by comparing its budgeted and actual results.
For example, assume that your budgeted salary costs for the previous year totaled P100,000 but your actual spending reached P150,000. You then can look for the reason for the variance of P50,000; you might find out that it was due to overtime costs that were not fully anticipated. In any case, the outcome of this process can provide you with valuable information for planning the next budget cycle and for keeping your business on track.
Of course, variances will occur when budgeted amounts differ from actual results. You need to trace the causes of these variances so you can correct employee behavior that is proving unproductive to the business. For example, you might discover that your food costs have overshot your budget because the staff has not been controlling your inventory properly.
There may be times, though, when your staff is not to blame for the variances. They may have been caused partially by your company’s lack of internal control. Whatever the outcome of the investigation, it is important that the performance evaluation be done in a positive manner. Perhaps you may even consider rewarding your employees every time they meet your budget; this is much better than the counterproductive short-term corrective measure of punishing them each time they fall short of that budget.