What is corporate budgeting?
Corporate budgeting is the practice of determining future goals for the company and structuring finances to match. The corporate budget is set at the executive level and then disseminated throughout the company with itemized goals.
A corporate budget is one that has been constructed by high-level executives for the company at large, including specifications for each major and minor department. The budgeting process comes from careful analysis of future goals set by management and broken down into actionable steps.
For example, the executive team creates a revenue goal for the year. Next, they break it down by quarter and divide it across each branch or unit. Local managers would then hand down an individual sales goal to a salesperson for that quarter.
This type of top-down budget planning is useful for large companies, especially if they operate nationwide, because it simplifies complex budgets for low-level implementation. However, this budgeting is sometimes criticized for oversimplification or manipulation to create the appearance of success.
Types of budgets
A smaller business might function well with only traditional budgeting, but as your business grows you’ll need a larger arsenal of business budgets. Most businesses utilize some combination of the following budgets.
Master budget: A master budget is an aggregate budget that includes all of the financial activity of the company. It includes all cost centers, all revenue streams, and all assets.
Operating budget: An operating budget is a short term budget created through forecasting and analysis to predict income and business expenses. Operating budgets create the financial action of the company and provide a baseline for analysis month over month.
Sales budget: A sales budget includes the projected expenses for sales over a future period, in dollars as well as units sold. A sales budget may be broken down by location or by product.
Capital budget: Capital budgets require you to determine the working capital you currently have and what will be available for upcoming purchases or financial moves.
Cash flow budget: A cash budget determines how much money will be available and when it will be available, especially in relation to outstanding accounts payable.
Financial budget: A financial budget is an informative budget demonstrating the financial health of the company, including the overall spending compared to revenue. Financial budgets are often used to illustrate the finances of the company for investors and to indicate value for a merger or acquisition.
Static budget: Static budgets are fixed, unchanging budgets that are not affected by other costs or revenue. Examples might include a company’s budget for rent or storage space.
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What are corporate budgeting exercises?
A corporate budgeting exercise is an intensive look at business finances with the goal of minimizing costs, increasing profits, and maximizing overall performance. Oftentimes there is a budget committee, or taskforce, made up of the CFO of a company and management leaders.
For some companies, these exercises are annual budget planning events that are scheduled no matter the financial state of the business. Budgeting exercises can also be conducted in response to underperformance or a major economic development (such as a global pandemic).
Common budgeting exercises
If your business budgeting exercise is triggered by a financial crisis then your budget plan might be an obvious path of cutting costs. Alternatively, if you have more foresight and greater flexibility, you can employ a few different approaches to assessing your budget.
A budget should never just be a collection of numbers or money that can be spent, but should reflect your strategic goals. One important budgeting exercise is to begin with the company strategy in mind. Is it growth? Is it sustainability? Is it survival? Whatever your strategy may be, take a closer look at your budget with that particular strategy at the forefront.
For example, if your strategy is growth, you may look more intensely at your budgets for talent acquisition and marketing, while scaling down areas that don’t contribute to meaningful growth.
Another way to take a fresh look at your business budgeting is through the lens of a goal. Perhaps your goal is to decrease overhead, or increase revenue, or save enough for a real estate upgrade. Rework your corporate budget specifically to meet those goals. This could include adjusting spending, reallocating funds, trimming non-contributing budgets, and promoting the performance that will accomplish the goal.
For example, if your goal is to decrease overhead you might trim budgets for administrative costs or assess the costs of rent or insurance for a possible change in provider.
Likely the most common corporate budgeting exercise is to find and trim wasteful spending. This will look different for each unique company, but will include evaluating business expenses for the value they bring to the company. Popular methods of budgeting can help businesses better identify opportunities to save, including zero-based budgeting and value-proposition budgeting.
An example would be searching for redundancies in staffing or auditing subscription services to cancel those that aren’t in use.
During a budgeting exercise many companies may uncover that their own policies contribute to excessive spending. By addressing the company policies regarding spending or budgets you may be able to save hundreds simply with a new budget process. Your company might investigate how stringent reimbursement policies are or the process for employee travel. By clearly defining procedures for company spending and taking the time to properly educate employees you can seriously decrease spending and minimize the risk of fraud.
For example, if you allow employees to book their own travel they might choose the most expensive accommodations allowed by the budget—even when the budget was created with more expensive destinations in mind. Changing your corporate travel policy to have HR book all employee travel can help minimize cost.
Smart executives know that you can entertain several new options before committing to change. A budgeting exercise might include simulating changes to budgets, including employee compensation packages or a novel use of space. During the COVID-19 quarantine many businesses were given the opportunity to simulate remote work and made the choice to shift permanently to remote work. With a budgeting exercise simulation you might ask questions like “What if we tried a 4-day workweek?” or “What if we consolidated multiple offices?”
For example, you might run the numbers of paying a greater contribution toward employee health insurance. Purchasing in bulk can be more cost-effective, and the tax deductions for businesses might save you even more than increasing compensation or directing that spending elsewhere.
The takeaway here is that regularly practicing corporate budgeting exercises will sharpen your financial tools and help you remain responsive to changing economic conditions. If 2020 has taught us anything it’s that we need to stay flexible and ready to make dynamic shifts in our budgets—and we will.
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