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Business Budgeting by Line item or Category: What Makes Sense

October 26, 2016
Budgeting
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If you could budget down to the individual employee level, should you? How about to the individual product level? Should those be broken out by state as well?Does it matter how much detail you include when budgeting for your revenues and expenses? Of course it does. The time and effort to create and maintain a budgeting plan can’t be discounted either. When you look at budgeting from decision-making standpoint, make sure you have the staff and tools to support the needs of your business. How granular you make your business budget has to consider those factors along with several other critical points.

Making Decisions There are 4 primary considerations to think about when you’re making your choice each year on how detailed you should get with your budget.

1. What’s Important?

Creating a budget isn’t just an exercise for number-crunchers. It needs to matter. Budgets help companies align their tactical plans with their strategic ones. They need to tie department level activities to the big picture goals of the organization. Setting your intentions and expectations in advance is critical for businesses as it is for individuals.That being said, deciding on how detailed to make a budget comes down to planning and decision making. No one has time for wasted effort. Are your revenue goals supported by expenses in the right categories to promote your products and businesses? Is your cash flow sufficient to manage the cash purchase of the lot next door in May? Get as detailed as you need to be to support the decision making that’s needed for your business to thrive.

2. Your Chart of Accounts

Don’t stray from enforcing your chart of accounts on your budgeting plan. Both halves of the coin need to be considered. Your production manager can’t be ambiguous about your inventory needs if he or she has already accounted for the expected obsolescence of stock in their budgeting plan.When you have your business budget mirror the financial and operational reporting you do for your actuals, you’ll have an easier adoption of the budget by management since little will need to be translated when the line items are familiar and in sync.

3. Experience

Your own level of experience at your organization, that of your staff, and of other executives should be considered when creating a working budget model. A new Sales Vice President might not yet have a good sense of the staffing levels in different regions to support the new product roll out. Allowing a higher level of planning would give the VP more latitude to distribute the allocated funds as more information is learned about your operations and the needs of your customers.

4. Input

t’d be naive to say that ‘the more detail, the better’ is always the case. If you’re looking at the current year budget and shaking your head and thinking that it really doesn’t matter if a department head decided that more office supplies were needed and she used money allocated to postage for it, then it’s time to raise the level of your budget.If on the other hand you have the department heads enter and manage their own budgets and forecast variances throughout the year and they find being that meticulous is helpful, let them go for it.  If your team has to spend time doing the Sales department’s budget data entry rather than on analysis, then I’d reconsider that point.

One Size Fits All?

When you’re on the front line of creating and managing budgeted line items, there isn’t a one-size-fits-all solution on how granular your budget should be. You’ve got to make the call based on the circumstances of your organization in order to find what level suits you. Having the flexibility to budget employees individually or by pay-category is what is key with any planning exercise. Use tools and dashboards that give executives and department heads the information they need to make customer acquisition and decisions wisely both at budget creation time and throughout the year.

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