Tuesday, February 26, 2013

The 5 P's of Budgeting

A budget is a financial tool, but it goes far beyond columns and rows of numbers to the values and priorities of a business, an organization, or a family.  While budgeting can be a complex and sometimes ambiguous process, keep in mind that a budget reflects 5 important things: it is a Proposal, Promise, Priority, Purpose, and Prediction.

A budget is your proposal to your stakeholders or your stockholders. Through your budget, you are proposing what you will do with the funds entrusted to you and your organization.

Similarly, a budget is also a promise. You are making an assurance that your resources will go for specific things. A budget is often used as a tool for accountability; it is a way to make sure your resources have gone to where you intended them to go.  

A budget is also a priority, in two unique ways.  First, your budget reflects the priorities of your business or organization, and also, it should ultimately be a priority in and of itself. Having and following a plan that complements your strategy and direction should be a priority to assure your organization is ‘on track.’

Likewise, budgets allow organizations to do things with purpose. Budgets have a managerial purpose for a business or organization. They establish a ‘steering’ function by providing efficiency in planning and control.

Finally, a budget is a prediction. When creating a budget, we are working in the realm of possibility and presumption. The unexpected occurs in both the “expense” and “income” columns of a budget, so it might simply be our ‘best guess’ of where resources will come in and out during a period of time.

Everyone in your organization is likely to view the budget quite differently. A board of directors may be interested in the ideology of a budget and how likely it will lead to wealth accumulation or perpetuate sustainability. A Director or CEO may place the managerial aspects of a budget at the forefront, using the budget as a planning and management tool for assuring the organization runs smoothly. Additionally, a bookkeeper, accountant, or treasurer is more likely to focus on the processes and technically-driven aspects of the budget so it can be executed well.  

Recognize that a budget isn’t ONE thing, but MANY things to many different constituents; that is the first step in an effective budgeting process. It may not be simple, but it will certainly be beneficial, when you allow your budget to serve a broader purpose than simply adding and subtracting your dollars and cents. 

Tuesday, February 19, 2013

The REAL Value of Budgeting

The word “budget” strikes fear in the hearts of many, and there are several reasons why.

Creating a budget may evoke images of shoe boxes spilling over with wrinkled receipts and checkbook registers with columns of numbers that refuse to add up. Living on a budget sounds like a constricting and fun-diminishing way to approach life. Understanding a budget might appear to require a daunting level of expertise in spreadsheets and number-crunching.

But put aside for a moment the images of number-crunching, calculating, and balancing.

Instead, think about what a budget truly IS, and what it DOES. Sure, a budget is associated with accounts and balances, but in reality budget has a lot less to do with dollars and cents and a lot more to do with values and priorities.

In simple terms, a budget is the way your business, organization, or family allocates its’ limited resources among a number of competing interests. Journalist Gloria Steinem is credited with saying, “We can tell our values by looking at our checkbooks.” Your budget speaks volumes about what’s important to you, because where your resources go is likely where your priorities lie.

The term “values-based budgeting” is a term commonly invoked by government entities, highlighting their attempt to reflect constituents’ values in their budgeting process. But nearly all budgets – businesses, nonprofit organizations, families, departments, and even families – implement some level of values-based budgeting. If your business places value on cutting-edge technology, you may prioritize a tech upgrade over new furniture in the employee break room. Likewise, if your family values outdoor recreation, you may see more money going toward skiing equipment rather than fast-food meals or a bigger television.

So if you are one of the people who fears budgeting because it seems too complex, restrictive or confusing, don’t focus as much on the MECHANICS of the budget but rather the MEANING it represents.

To be effective with a budget in your business, organization, or family, you don’t need a degree in accounting, and you don’t need to be an Excel spreadsheet expert. Instead, you need to understand your priorities, communicate your values, find ways to compromise, and ultimately, be flexible.

A budget goes far beyond columns and rows of numbers to the heart of a business, an organization, or a family ... that is the REAL value of budgeting.