Understanding How to Manage Budgets
In order to manage budgets effectively and efficiently, it is necessary to:
- Monitor, control, and record all the finances (income and expenditure),
- Know how to minimise costs in the areas that you are responsible for,
- Be able to investigate or identify problematic areas and rectify them, and
- Efficiently manage and authorise expenditures.
This article is based on the NVQ Level 4 unit, "Manage Budgets" and has a credit value of 5. In order to get a clear idea and understanding of the purpose of budgets, which is the first part to this article, please read the article linked below. You will get an understanding of the purpose of budgets, including the benefits of managing financial resources effectively and efficiently, the legal, regulatory and organisational requirements for managing a budget, and the different types of budgetary systems and their features.
- Manage and Understand the Purpose of Budgets
Managing budget is an ongoing process for any organisation or business and it requires continuous monitoring, controlling and reporting, which is the budget manager's responsibility.
Now need a thorough understanding of how to manage budgets.
The budgetary process is the sole responsibility of senior management staff and finance staff. Hence these members of staff must have accurate and updated information efficient budgeting procedures. Budgets are developed for each financial year. The managers and staff involved will have to develop budgets for their own areas of responsibility and then hand it over to the finance department. These draft budgets are then reviewed by higher management and later approved by a committee, or something similar depending on the organisation.
2.1 Describe Methods for Monitoring, Controlling, and Recording Income and Expenditures
You know the purpose of budgets. Now it is your responsibility to manage them.
Managing budgets requires you to constantly monitor, control, and record income and expenditures to keep track of every financial movement and its outcome. How will you achieve this? Let us look at a few ways or methods.
Monitoring Income and Expenditure:
Budget monitoring is done to make sure that resources are being utilised as per plans on the budget. Tracking or monitoring the way that financial resources are utilised or effectively used is very important for every department and the organization. It is a continuous process to ensure that objectives are being met as specified on the budget. It is through this monitoring that you will be able to make budgeting decisions and take necessary or appropriate actions whenever or wherever necessary.
Managing and Controlling Budgets
Income and expenditures need to be monitored to find any change in patterns so that appropriate actions can be taken. This monitoring procedure can be done at regular intervals, for example every month. When monitoring data, take into account that the budget that was planned for the year ahead, and the expenses and income to date. Look at the balance remaining for the rest of the period in the current financial year and run a forecast of what the situation will be at this rate by the end of the financial year. Look at any variations, if any, both positive and negative, and take necessary actions to rectify them. In each step, it is important to document (record) all facts and actions.
It is best to monitor the income and expenses at the budget holder and higher management levels through regular meetings. There must be effective cash flow management, as it is very important for the services and products that the business delivers.
Budgets can be split according to cost centres or other codes or levels, so that it is easier to monitor them. This will help to identify areas that over-achieve and under-achieve.
You should be able to analyse and provide explanation for any variation from the proposed expenditure, be it positive or negative. This has to be accompanied by an action plan. This will ensure that the resources were used economically, efficiently, and effectively.
Controlling Income and Expenditure:
The next important issue is controlling the income and expenditure. Without this step, one will be spending money out of track. In order to control the income and expenditure, it is best to directly involve the person in charge of controlling a department's finances and performance while developing the budget. The available budget should be communicated with all the relevant staff.
There may be different sections of the budget that will be controlled by different staff, so it is best to allocate and give authority to the people who are directly involved—for example, the approver of budget and the budget manager. The departments or teams should be made aware of the person who is responsible for controlling the income and expenses.
The total amount of finances available for a particular year should reflect the total expenses planned for that particular year.
Recording Income and Expenditure
Recording income and expenditures can be done manually or electronically. Recording has to be done instantly and on a daily basis. All the accounts related to income and expenditure, any income that is due in, any payments that were received, receipts and invoices issued, debts etc., need to be recorded clearly with date and purpose.
Recording income is a way of determining whether the business is making profit or not, because it includes details of money received and spent.
5 Great Tools for Tracking Business Expenses
Record details of the areas of business in order, starting from the most profitable to the least profitable. This will automatically help you analyse and take action on areas that create huge loss.
For small expenses, it is good to use petty cash account to use for and track the small expenses. Recording these will help with efficient reimbursement of money and only recorded money will be reimbursed. This is an efficient way of recording small expenses that may otherwise go unnoticed.
2.2 Describe Ways in Which Costs May Be Minimised in Own Area of Responsibility
Reducing costs in business is one efficient way of managing budgets or available funds. If everyone minimises costs in their own area of responsibility, it will altogether add up to huge savings for the business. One needs to know to make right choices when it comes to spending money on specific areas of the business.
The ways in which costs may be minimised in own area of responsibility are:
Make effective use of technology:
- There are many advanced technologies available these days, right from online shopping to paying bills etc. Make efficient use of these technologies as they save time and money.
- Meetings can be held using teleconferences, which means you save money on travelling, arranging rooms/venues, save time on organising and planning for meeting rooms etc.
- You can make efficient use of technology by not printing on paper and using electronic storage for files and other business data. This saves time, money and the environment.
- Some businesses can be managed online depending on the nature or at least the marketing can be done online. This will help save a lot of money spent on marketing staff, office space, equipment, etc.
- Credit cards have high interest rates and hence they have to be paid as soon as possible. This will help the business in the long run.
- Always develop a budget for your area of responsibility and adhere to it. Any deviations from it can be quite damaging, but it will give you a clear plan of what to do and what not to do and what to avoid.
Cutting Down on Expenses:
- Only buy the necessary stationary, equipment, furniture, softwares necessary for day to day running of the business. Cut down on any other unwanted expenses. Buy energy efficient machines and use energy bulbs so that you can save on energy bills. Use proper insulated doors and windows. Sometimes manufacturers sell refurbished items at a lot lower prices and if they seem to be of good quality, go for them.
Work From Home:
- This is an efficient way to save money from office space and fuel costs. While cutting costs, it is wise to cut them in the right areas as cutting costs in the wrong areas can have a disastrous or negative effect. Always look for good value for money and this can be achieved by maintaining good relationship with suppliers and partnership organisations.
2.3 Identify Situations in Which Corrective Action May Be Needed
Corrective actions are required in areas that do not conform with the organisation’s policies, procedures or processes. The reasons for these non-conformities need to be identified and preventive measures need to be taken from these occurring in the future and this is called corrective action. Corrective actions could be taken as a result of a complaint or an audit or adverse effects on company’s finances and so on. In order to take the right action, investigation needs to be carried out on the particular issue.
Some situations that may require corrective actions are:
- Project budgets getting out of hand. his can be avoided if you closely oversee the budget and also if the employees know that you are overseeing the budget. Review and re-forecast the budget weekly.
- Work that takes time longer than planned and hence requiring additional budget, effort and time.
- When one or more of the team members dump a project.
- When a task or project is out of schedule or over the budget due to technical or financial constraints.
- An important task or project or objective being missed.
- When work or tasks performed do not meet the objectives.
- Customers not being happy with services or products as they do not meet specifications or expectations.
- When a resource or sponsor fails.
- During risk assessments, audits or quality assurance inspection.
Corrective actions could be anything like re-planning projects, reallocating resources, reorganising teams, managing projects differently, redesigning processes or products etc. Identify root cause and take necessary actions.
2.4 Describe the Scope of Own Authority for Managing a Budget and Authorising Expenditures
Managing a budget is not about just keeping the finance numbers right, it is also about managing the people involved. For example, the employees or team members. One needs to possess good management skills to manage budgets and authorise expenses. The budget holder has the responsibility for the money allocated on for a particular budget and hence they need to check if expenses are legitimate and then authorise the budget. Authority to spend does not mean that one can simply spend the allocated money, just like that; it means money needs to be spent responsibly and wisely. One can get into trouble if there are failures in budget management and also get rewarded if they were successful in budget management.
While managing budgets and spending the budget money, the budget holder has to keep in mind the aims and objectives of the organisation. There will be specific goals and responsibilities which need to be taken into account to achieve the targets or goals. One also has to keep in mind the legal regulations and organisational requirements when handling/managing budgets. Always take necessary actions to minimise costs and also appropriate actions in case there was overspend on budgets.
Monitor, control and record income and expenditures. Create documents that outline the performance of the organisation against the budget. Keep all records up to date and accurate.
The Next Part of This Unit: How to Report Performance Against Budgets
- Manage Budgets - Understand How to Report Performance Against Budgets
Managing a budget does not stop with just management, but also involves reporting performance against budgets. This has its own purpose and benefits and also helps with future budget forecasts
I hope that you found the information here useful. Please do not hesitate to leave your thoughts and experiences. All the best and thank you for stopping by.