New system of financial control and budgeting

Budgets communicate desired fiscal performance between all levels of management.

Images

For the hands-on manager, maintaining an overview on the big picture is difficult when caught in the various crises and firefights of day-to-day operations. A budget provides a road map for performance that offers detailed information about expected outcome that a proactive manager can use to guide decisions toward desired goals.

Planning

As a manager looks forward over a period of business and prepares, he may consider how much material or staff is needed. When a budget shows expected sales over the same period, the manager can take budgeted costs of sales and work backwards to determine raw materials needs or labor hours required. Effective managers will consider adjustments based on current market conditions that may vary from the time the budget was devised. For example, if sales have been performing 3 percent over budget for several months, the manager may add this to his calculations.

Prioritizing

Comparing year-to-date performance to the budget may help a manager decide how to approach a problem or challenge. For example, if labor costs in a particular area are higher than budget, but new equipment purchases are under budget, a manager might requisition a new machine that helps reduce labor moving forward. In this case, the budget serves as a justification for a proposal. As an account item climbs over budget, it becomes a manager's priority to control.

Continuous Improvement

An effective manager is not just looking to meet budget, but also looks for ways to improve. With weekly or monthly performance numbers compared to budget, a manager is a first-level systems analyst for operations. Working at floor level, for example, a manager could work with employees for ways to increase throughput or reduce waste. The budget often provides clues as to where effort is most effectively focused to produce improved financial performance.

Forecasting

One year's budget often serves as a basis for the following year, and when managers are involved in the budgeting process, each of the previous steps can be applied looking forward. Managers may be in a unique position to observe the effects of improved staff training, for example, as a contributor to improved performance. Forecasting becomes a chance for an effective manager to reach beyond the bounds of his department to suggest changes that may create better conditions for financial success the following year.