A common misconception is to think of a budget as something that prevents spending.  On the contrary, a budget is really a plan that prioritizes how company funds can best be put to use.  Putting together, forecasting and following a budget is the key for any business to succeed.

Purpose of a Budget

 “The entire world is based around budgets,” says Al Tate, a business manager for a Midwest sporting goods retailer. “We watch the nightly news and we hear them talking about the national budget. You go to work at a major company or go into business for yourself and everything is related to a budget. You go home and balance your checkbook – and figure out your family budget. It’s not a buzzword, it’s THE word to succeed by.”

A typical budget has four purposes:

• Identify expenditures for the upcoming year

• Prioritize the importance of upcoming expenditures and compete for funding of requests deemed most important to the company's strategic plan

• Plan financing for those expenditures

• Monitor and control expenditures

According to SCORE, the Service Core of Retired Executives (www.SCORE.org), which offers free business advice to small business owners, a budget will also help you:

• Make better decisions
• Enable you to develop and maintain an understanding of the internal financial workings of your business
• Understand how to set prices and profit margins
• Understand the need to hire and/or fire employees
• Where to cut back/where to add resources
• Paint a picture and projections involving the short and long term financial future

Methods of Budgeting

Office managers should be familiar with the three basic methods of budgeting:

• Incremental
• Zero-base
• Compromise

Incremental budgeting is a method that simply adds a percentage of increase (or decrease) to the budget amounts for the preceding period to arrive at new figures for the upcoming year.  This method has the advantage of ensuring all departments share equally in increases (or decreases).  The disadvantage of this method is that there is no line item or department by department assessment of profitability or waste.

Zero-base budgeting requires that each line item be justified each budget period and helps ensure that each request continues to be appropriate based on current needs.  The advantage of this method is that each line item competes against other requests and is evaluated each year with regard to overall costs and benefits.  The downside of this method is that it can be difficult to compare and grade competing requests, especially when the requests are from different departments.  In addition, this method requires substantially more time and effort to produce the budget each year.

A popular method of budgeting today is compromise budgeting.  This method incorporates features of incremental and zero-base budgeting.  For example, the initial budget may start at 90 percent of the budget for the previous year and require items above that “mark” to be justified and competed with other requests.

Preparation and Monitoring of a Budget

Administrative services are part of the “costs” of achieving sales and revenue goals and ultimately contribute to the profit (or loss) of the company.  Office managers who are responsible for delivery of centralized services, when preparing their budgets, must solicit information from the departments they support regarding administrative needs for the upcoming year.  Will they need the same services as the preceding year?  Are they planning any special projects for which additional administrative service funds should be budgeted?

Once the budget is established, it is then important to closely monitor budgeted costs v. actual costs throughout the year.  If variances develop, it will be necessary to make adjustments.  For example, if one line item becomes over budget, it may be necessary to cut back on other line items to ensure the overall budget is not exceeded.

There are a number of off-the-shelf and custom software solutions that are designed to help you prepare and monitor a budget.  Two popular accounting programs are Peachtree by Sage (http://www.peachtree.com ) and Quickbooks by Intuit (http://quickbooks.intuit.com).  Both have budgeting features that integrate with your existing accounting information and both have modules designed for specific industries.  These programs are designed to make budgeting easy and help ensure your budget is thorough and complete.

Ten Budgeting Tips for Your Next Fiscal Year

Following are ten key elements you should incorporate into the budgeting process from the Fiscal Fitness Newsletter, published by Blackbaud, Inc.

1. Begin with a strategic plan

The strategic plan defines how your organization will deliver on its mission. The plan should be agreed on by executives and should happen before the actual budgeting process. Decide how to measure the effectiveness of initiatives. Not everything is measurable -  identify what is and decide whether it is an acceptable approximation for success.

2. Prioritize strategic initiatives

You will probably undertake more than one initiative to support your mission. Some initiatives will be more mission-critical than others, and some initiatives will be expected to deliver more impact than others. Weigh short-term and long-term goals against each other.

3. List the tasks associated with each initiative

Assign ownership of tasks. This helps you enforce accountability for delivering on initiatives.

4. Analyze the revenue stream - including expected cash flow

Look for seasonal patterns and for high demand within the range of services you offer. Based on past experience and current events, estimate what the revenue pattern will be for the upcoming year.

5. Create a cash flow budget

Cash is a vital resource for your organization. Once the annual and operating budgets have been finalized, they can be converted into cash flow budgets to verify the availability of resources and to highlight times of slower cash flow.

6. Analyze past spending patterns

Look at the effectiveness of past spending, and determine if it produced the desired results. Ascertain whether the results were attained as cost effectively as possible. Determine if past measurement methods produced an acceptable approximation of success. Analyze where efficiencies can be gained by negotiating better terms or rates.

7. Develop a capital budget

Capital budgeting is the process of making long-term planning decisions for investments. Good long-term decisions help your organization extend its reach into the community and expand its services.

8. Gather team input

Those responsible for overseeing the implementation and delivery of a particular program should have input on whether the goals are achievable based on current resources - time, money and staff.

9. Consider the use of a rolling budget forecast

Traditionally, budgets are done for 12 months or on an operating cycle. Consider the use of a rolling budget forecast - start, as usual, by budgeting for 12 months ahead. As each month passes, have department and program managers add a month to the end. This eliminates the need for heroic one-time efforts each year and a resulting document that becomes gradually obsolete as time passes.

10. Send budget and actual reports to the budget managers every month Ask them to explain variances and reforecast as necessary.

Conclusion

Office managers are responsible for preparing budgets for administrative services (such as office supplies, equipment, furniture, technology, and services) and, in small offices,  may be responsible for preparing the entire operating budget.  A basic understanding of the practices outlined above is vital to the operation of their office and success of their company.