There are various methods for creating budget planning in companies, which we will discuss in more detail in this article. In principle, the goal of budget planning is to clarify in advance what financial resources are used for in the company in order to achieve the overarching, strategic goals.
Budget planning – definition
According to DigoPaul, budget planning is a form of short-term planning in companies that regulates the distribution of financial resources for the next planning period, usually one year. A bseits financial aspects regulates this, the availability of resources such as personnel, capital and machinery .
The methodological background of budget planning has its monomer originating in the liquidity plan , the Controlling and cost accounting as well as modern budget planning methods such as the Zero Based, Advanced Budgeting and Kaizen budgeting.
Operational and strategic budgeting
A basic distinction must be made between operational and strategic budget plans in budget planning:
- When operational planning is assumed that a time horizon of one year. The focus here is on allocating resources concretely and planning them in more detail. Which funds are used for what and which short- and medium-term goals are to be achieved through this use of funds. This means that other factors are directly related to operational budgeting, such as employee motivation and breaking down into smaller sub-goals that need to be achieved.
- In the case of strategic budget planning , the time horizon is extended and is in the range of two to five years. The focus here is on long-term planning, which is primarily intended to enable the general success of the company and to ensure the company’s continued existence. Here, strategic goals are considered that are striven for over a longer time horizon.
For the purpose of budget planning, there are various types of planning that we would now like to introduce to you as an overview.
This form of budgeting is also known as “retrograde budgeting” . The planning is based on the specifications of the higher-level departments in the company, which define and provide a specific budget. A practical example would be if the board of directors, who is responsible for production, informs the material purchasing department of a certain budget and this must be adhered to.
In this form of budget planning – as a “progressive budgeting” refers to – it’s just the opposite. However, this is not a request from the employees, who always carry their budget ideas to the next higher position. It is much more the case that small-scale planning is first carried out and a budget requirement is determined. These small parts of the planning increase upwards until a total budget is ultimately created. For example, the budget requirements for three projects in a department are determined first at project level, then the budget for the entire department and so on.
The countercurrent process tries to combine the best of both worlds. First there are bottom-down requirements for the budget, followed by feedback in the form of concrete planning of the respective areas back, i.e. bottom-up. This process is intended to ensure that a common denominator is found that is satisfactory for all parties involved. The main advantage of this procedure is that all those involved are included equally, although this type of planning also causes greater effort .
Zero Based Budgeting
A big trend is what is known as “Zero Based Budgeting” . This theory says that the budget plans are not carried over from the previous year, but are created anew every year. This prevents even larger budget amounts from being used up quickly, especially towards the end of the year, just so that a department can get the same budget available again in the next year.
Tasks and goals of a budget plan
Basically, the overriding goal of any corporate planning is to contribute to the implementation of the company’s strategic projects. To make this possible, the corporate goals must be as clearly defined as the allocation of resources is planned. Budget plans can be argued through clear, comprehensible and, above all, measurable goals. This also makes the entire budget planning measurable – an ongoing target / actual comparison is thus made possible.
However, it is not only important to check compliance with budget planning, but also that the planning is broken down in an understandable way at the level of the individual employees. In this way, the goals and the planning content contribute to the behavior control and motivation of employees. In order to create motivation in particular, it is important that goals and planning are concrete, measurable and realistically achievable. This measurability should be openly presented to the employees so that they know in advance how the achievement of goals will be assessed later.
As a higher-level planning, budgeting also serves as a certain framework for other planning processes in the company that take place on other levels, since all individual planning is always budget-relevant and therefore budgeting must always be taken into account.
The entire budget can be split into different partial plans. These individual plans are all directly related to the actual budget planning and each regulate a specific, financially relevant sub-aspect.
The investment plan regulates which investments are planned to be made at what point in time. It goes without saying that relevant investments are to be planned more precisely and smaller expenses are negligible. From a strategic point of view, other aspects, such as depreciation effects , must also be taken into account in order to clarify when the ideal time for investments is.
A material plan is primarily relevant for manufacturing companies and regulates when which material should be purchased. Bundled purchases and good planning reduce costs accordingly.
The focus in the production plan is when and how much is produced. This planning goes hand in hand with the sales planning, sales planning and the company’s storage options, so that there is no overproduction (consequence: high storage costs), but also no underproduction (consequence: delivery difficulties).
The sales plan influences all other plans described so far. Because based on the sales plan, the material is purchased and production is organized. This plan is also particularly important for motivating the sales force. In order to bring you to maximum performance, a structured sales plan shows where which sales opportunities lie, which expectations are present on the part of management and which goals are to be achieved in the planning period. Here, too, measurability and realistic accessibility are again of great importance in order to really build motivation.
In addition to the sales plan, there is the option of creating a sales plan. As a supplementary guideline, it defines, for example, which new products come on the market when, where they are sold and which existing customers can be confronted with these new products from when. The sales plan is basically similar to the sales plan, but it can further increase motivation in sales, as it underlines the great importance of sales success.
Budget planning – conclusion
The entire budget planning is of great importance for every company. The effects of planning are so far-reaching that they really affect almost every part of the company. At the same time, good planning can also help motivate employees and thus fulfill other functions apart from the planning content.