Budgeting Cycle or budget cycle refers to the steps or phases that a company or an individual or a government organization needs to go through to come up with a budget. The budget is the estimation of the expenses that a company expects to incur in the future.
We can also say that the budget cycle is the life of the budget, starting from developing a budget to assessing it. Often businesses that make the budget go through these phases without even realizing they are following the budget cycle.
Budgeting Cycle – Importance
The budgeting cycle is mainly of use to the government agencies, which need to come up with a transparent budgeting process. However, nowadays, businesses are also readily using the concept and customizing it as per their needs. Generally, a budget cycle is longer than the company’s accounting period. It starts before the accounting period and ends after the accounting period.
Following the budget, cycle makes the whole process intelligent and accountable. It is because the entire process uses research, past data, and estimates. Also, since the segments of the budget cycle are well defined, it encourages the budget creator to meet all the guidelines, such as constant input and revision, to come up with an accurate budget.
Thus, we can say that the budget cycle helps to control costs, assist the finance department in the preparation of the reports, and help management make more informed decisions.
Now that you know the importance of a budget cycle let’s talk about phases in the budgeting cycle.
The budgeting cycle primarily involves four phases – preparing and submitting, approving, executing, and monitoring.
Preparing and Submitting Budget
The first phase in the budgeting cycle is to create the budget. A business must use its leadership vision to decide on what to include and exclude from the budget. Also, the management should take the suggestions and recommendations of the ground-level employees. A budget must include targeted revenue and the estimates of expenses that a business needs to incur to meet the revenue targets. Also, the budget should consist of any improvements that a company expects to go for in the near term.
Once the budget is ready, it needs to be approved by the department heads and the top management.
Getting the Budget Approved
Approving the budget is not just a simple yes or no. Instead, it may involve extensive debates before a budget gets final approval. A budget may move back and forth for edits and corrections until all parties approve the document.
If possible, the business must do an extensive discussion on the budget involving all the stakeholders. In the case of a small company or sole proprietorship, the owner must discuss the budget with the accountant or have an independent authority to review it. The budget should get approval only after the review, discussion, edit, and corrections (if any).
Executing the Budget
Once you get the approval for the budget, the next step is to start executing it. The execution of the budget usually starts with the beginning of the accounting period. Generally, the business operations are performed following the budget. In case the revenues and expenses are not as per the budget, then you should use your business tactics to manage the situation. However, you should not let the budget to impede or limit your business decisions.
A business must create and maintain spending records. Such records help in ensuring internal and external accountability. They also serve as useful data points for the next budget cycle. Such records also help to identify trouble spots or opportunities to save some funds or earn more revenues.
Evaluating/ Monitoring The Budget
A company or an individual should regularly evaluate the budget. Regular evaluation helps to make timely revisions to the budget based on internal and external factors. These changes could be revising revenue targets, adjusting costs, or making an adjustment to the budget with any newly available information.
Regular evaluation is also necessary to identify variance if any. Variation is the deviation of the actual spending from budget spending. Even when evaluating the budget, the focus should be on boosting the profits.
A final evaluation of the budget is done after the end of the accounting period. This evaluation provides the overall feedback on the budget, including how accurate it was, cash flow management, and more. Such feedback helps in the preparation of the next budget and assists management in making better financial decisions.
Budget Cycle vs. Budget Period
As said above, the budget cycle is usually longer than the accounting period. A budget cycle includes the time for planning, preparing, approving, executing, and evaluating the budget. The budget period, on the other hand, is the actual period to which the budget applies.
For example, if a company prepares the budget quarterly, then the budget period will be three months. But the budget cycle will start before the quarter and end after the quarter completes.
Types of Budget Cycle
A budget cycle is primarily monthly, quarterly, and annually.
Monthly Budget Cycle
The budget period starts on the first day and ends on the last day of the month. Since different months have a different number of days, the monthly total will differ from month to month. In a monthly budget cycle, a business usually maintains twelve budget cycles, but these are mostly at the department level. Also, the monthly budget cycle covers only a few income and expense items.
Quarterly Budget Cycle
These are more popular than the monthly budget cycles. It is because they reduce the burden on the company in terms of preparing, monitoring, and analyzing the budget. Also, quarterly budgets are more useful if the business of the company is seasonal.
Annual Budget Cycle
It is the most current budget cycle. The annual budget period for most companies globally is from January 1 to December 31.
As the word budget cycle suggests, budgeting is an ongoing process. Once a company is done with one budget cycle, it gets time to start preparing for the next budget cycle. And, the business, or individual or the government, would go through the above phases all over again. For big companies, there is an exclusive department that deals with budgeting and always remain busy with budget cycle activity.
Quiz on Budgeting Cycle
This quiz will help you to take a quick test of what you have read here.