Definition: Budgeting is the process of planning future business activities by establishing performance goals and putting them into a formal plan. In other words, budgeting is the process of making financial goals for a company and creating a plan to achieve those goals.
What Does Budgeting Process Mean?
Creating a budget is much more than management sitting down and coming up with performance numbers that they want to meet in the next quarter. A budget is really plan for the company’s future. Managers and board members meet and discuss where they want to see the company in years to come, what markets they want to exploit, and what products they want to create. In order to achieve any of these long-term plans, the company must have a way to create opportunities and track the progress along the way. That is exactly what a budget does.
By budgeting for the future, management can calculate increases performance and increase the likelihood of success. They typically start the budgeting process by setting future goals and analyzing past performance. Once management has a good idea of how the company has performed historically, they can start making estimates and performance goals for future expected performance.
The budget doesn’t stop with just making performance goals. Management must evaluate and compare the actual performance with the expected performance periodically to see how well close the company is to achieving its goals. If certain departments aren’t meeting their goals, management must correct the problem during the period, so the company, as a whole, can meet their numbers by the end of the period.
As you can see, the budgeting process is much more than simply creating a report at the beginning of a period. It’s an ongoing effect to improve the performance of the company by tracking actual results and comparing them to specific goals.