The purpose of corporate budgeting
Corporate budgeting is a business process to identify how much revenue can the company potentially make in the next one to five years and how much money does the company need to spend to earn that revenue. To a layman, it is simply a case of identifying how much more you want to earn for next year and multiply all the numbers by a certain percentage. If that is how you are doing your budget, then I would agree with you that it is a total waste of time. Don’t do it at all. Budgeting is to identify the line of businesses/products that will bring you a stable stream of income as well as those with high growth potential and the cost associated with these businesses/products.
Budgeting is not only a process to establish a plan on how you are going to achieve your profit for the next one year, but it is also a time for you to review how you have done in the past one year.
For example, a review of our business showed that almost half of our revenue for last year came from our Advanced Excel Training Course – “Unleashing the Potential of Excel”. This was unexpected as our initial intention is to use the course as an advertising channel to promote our consultancy services. The review identifies an additional line of business for the company and we decided to put in more resources to take advantage of this new income stream. At the same time, we have to set aside some money for expenses for the launch of our new solution which cut short their budgeting time by half while budget planners can consolidate the numbers at a click of a button, without moving away from Excel. The process triggers a preliminary review on the price we plan to set for the solution and how many customers we intend to convert in the first year. Doing the exercise is important as we can project how much revenue this solution can bring us this year and how it would fare in the next 5 years.
With the plan in place, we will be able to isolate the impact and understand how the existing business is faring and how this new line of business will add to the bottom line. Without the process, we will be running in the dark and this may slow down the growth of this revenue stream.
The above exercise is very important to the management as they will not have the time to follow up with the activities. The plan will gave them the opportunity to delegate the project to someone suitable and this person would be able to operate with more autonomy with a given plan. And should the project deviate from the plan, the person and/or the management can then schedule an adhoc review on this line of business, such as, putting in more resources if the growth of this revenue stream exceeds the expected growth.
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