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. 

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