Budgeting Basics
What is the primary purpose of financial budgeting?
To plan company expenses and revenues for a specific time period.
What is the main characteristic of Zero-based budgeting?
All items start at zero dollars before reallocating.
How long does the basic corporate financial budgeting process usually take?
Between three to six months.
Who is typically responsible for ensuring that the budget is followed?
The budget owner, often operational directors and managers.
What common problem do finance teams face related to data in the financial budgeting process?
Disparate, wide-ranging sources of disconnected data.
Explain the difference between financial budgeting and financial forecasting.
Financial budgeting sets the company's financial direction, while financial forecasting estimates future income or revenue.
How does Static budgeting differ from Incremental-based budgeting?
Static budgeting adds or subtracts a percentage from the previous period, using historical data
List three steps involved in the financial budgeting process.
Establish and communicate targets, develop a detailed budget, finalize employee compensation plans.
What role do department managers play in the financial budgeting process?
They provide information throughout the process, reporting revenue contributions and expenses.
How do manual processes affect financial budgeting?
They are slow, labor-intensive, and lack the version control and data integrity of automated tools.
What are the key components typically included in a financial budget?
Predicted revenue, fixed expenses, variable costs, and capital expenditures.
Briefly explain Performance-based budgeting
It focuses on cash flow per unit toward programmatic results, often used by governments and nonprofits.
Why is monitoring progress throughout the budgeted period important?
To assess performance against goals and adapt the plan as needed.
How does the finance and accounting team contribute to the financial budgeting process?
They manage accounts, create reports, and provide input for top-level budgets.
Why are time-consuming data collection and input automated in financial budgeting?
To reduce errors and speed up the aggregation process.
Name and briefly describe two types of financial budgets mentioned in the article.
Zero-based budgeting (starts at zero and reallocates) and Activity-based budgeting (determines costs to achieve goals).
What does Value Proposition budgeting assume about budget inclusion?
Only line items directly providing value to the organization should be included.
Explain the concept of rolling forecasts.
Rolling forecasts project beyond the annual budget, updating periodically based on changes in the business environment.
Who is directly accountable to the board of directors in the financial budgeting process?
Corporate executives, including the chief financial officer (CFO).
How does Planful financial budgeting and forecasting software assist with financial budgeting?
It provides audit trails, workflows, and data validation measures for confident financial budgeting and forecasting.
Why is financial forecasting important, and how does it differ from budgeting?
Financial forecasting helps analyze trends and future costs, providing a basis for adapting plans. Unlike budgeting, it focuses on future-facing assessments.
Why might an organization choose Activity-based budgeting, and how does it work?
It works backward from goals to determine costs, improving efficiencies. It's useful for large businesses.
How can financial forecasting help during unforeseen events, like the COVID-19 pandemic?
It enables executives to rework budgets rapidly to account for safety concerns, major losses, and potential reputation damage.
Why might a company employ a committee of multiple budget owners, and what challenges may arise from this approach?
It's more democratic but less efficient, leading to indecisiveness and infighting.
What are the key benefits of using data-driven platforms in financial budgeting?
They offer real-time tracking of KPIs, enable collaboration, and help in sharing insights for agile budgeting and planning.