What is budget management?
Budget management, sometimes called budgetary management, is the overseeing of revenue and expenditure tracking in an organization. Managing a budget involves analyzing current spending, organizing purchases by category, and monitoring cash flow over time.
A medium-to-large business typically has separate budgets for the company and for individual departments. Department heads and budget managers use keen analytical skills and a careful eye for detail to make sure the department maintains positive cash flow and reasonable spending.
With proper budget management, an organization can boost profitability and growth. Budget management and forecasting software helps companies organize data and plan for future decisions.
Types of budget management
Whether a business is large or small, company leaders must closely manage income and expenses to maximize profit. A single business may have different types of budgets, such as a master budget and an operating budget. They may also use different methods to manage these budgets. Some of these methods include:
- Zero-based: This type of system is built from the ground up. Since starting fresh is time-consuming, executives choose to use this method in one department at a time or over the course of several years. This forces a company to evaluate and cut non-essential expenditures.
- Activity-based: This one is built from the top down. The goal is to analyze cost drivers and optimize productivity and efficiency. The activity-based method is time-intensive and helps a company save money. Because this type is future-focused, historical data isn’t necessary. That means even new organizations can use this approach.
- Incremental: This moderate system uses a company’s existing budget as a base. Organizations then adjust as needed for the upcoming time period based on inflation and other projected costs. This method is popular due to its simplicity.
- Value-proposition: Budget managers or department heads use this type to analyze each line of the budget to determine whether an expense's value is worth the cost. While value can be subjective and tricky to quantify, this method can help leaders tailor a budget to its desired outcomes.
Benefits of budget management
Hitting key financial targets requires accurate budget management. Other advantages include:
- Assisting in planning: Budget managers can use past budgets as historical data when making decisions for the future. For example, a department head might consider past years’ spring expenditures when creating a new budget for April with a rolling forecast.
- Monitoring progress: Current budgets can be closely monitored to make sure revenues and expenses work as projected. A manager can catch higher-than-average outflows and suggest smarter spending solutions.
- Making decision-making easier: A detailed budget and strong management simplify the decision-making process. For example, looking at projected growth makes it easier to figure out whether funds are available to hire new personnel.
Budget management best practices
Budget management has the potential to add financial clarity to businesses of any size. Follow these practices for best results:
- Collaborate with appropriate team members. The best budget management is marked by accuracy. To get the most precise numbers, an executive often needs to talk to a vendor, a coworker, or a department head. Sometimes a company might even distribute a survey to collect useful data.
- Select a suitable software program. Most organizations today manage their finances through budget management software, which allows them to plan, analyze, and report. Some products feature special automation and integrations for companies of different sizes and industries.
- Create alignment. Remember that the company’s spending affects its day-to-day operations, and the operating tasks should reflect the company’s overall strategic plan and vision. Alignment at all levels creates cohesion.
- Review the budget on a set schedule. Decide on a schedule for reviewing the budget and stick to it. Compare projections with actual cash flow. Analyze the reasons behind the differences and consider the progress made toward goals and objectives.
Kelly Fiorini
Kelly Fiorini is a freelance writer for G2. After ten years as a teacher, Kelly now creates content for mostly B2B SaaS clients. In her free time, she’s usually reading, spilling coffee, walking her dogs, and trying to keep her plants alive. Kelly received her Bachelor of Arts in English from the University of Notre Dame and her Master of Arts in Teaching from the University of Louisville.
