The Latest Trends in Budget Management
Today, budget management is a necessary process for the efficient administration of an organisation, and an essential lever in defining strategies and guiding decision-making.
1. What is budget management and what is it used for?
The principles governing budget management are defined as the guidelines that apply to economic/financial management and business analytics. Specifically, they are focused on:
- Effectiveness in the achievement of the objectives set.
- Efficiency in the allocation and use of resources.
- Control of the management of results.
- Cooperation and coordination between management bodies.
Budget management is therefore about establishing mechanisms to:
- allocate budgets to a set of organisational structures to achieve the company’s goals, based on forecasted revenue.
- Monitor, control, evaluate the compliance of and adjust budgets to maximise the probability of achieving dynamic results that adapts to organisations undergoing constant change.
2. Differences between public- and private-sector budget management
Budget management models are different in the public and private sectors.
In the public sector, the expenditure ceiling is directly related to revenue forecasts. While the possibility of running a structural deficit exists (the maximums of which are regulated at both state and regional levels), public bodies are subject to the principle of budgetary stability.
In the private sector, budget management is considered an action plan established to achieve a goal or series of goals. Specific costs that can have a significant effect on a company’s operations are usually excluded from the budget control. For example, plant and machinery maintenance can be estimated, but not planned.
3. The most common budgeting models
Budget monitoring, control and evaluation essentially work the same way regardless of the organisation or technology used. However, different planning strategies exist, each with its advantages and drawbacks:
- Top-down budgeting uses a defined budget. This type of budget management does not include the participation of lower-level management.
- Bottom-up budgeting, also known as participative budgeting, is a process in which all budget managers participate.
- Incremental budgeting consists of using the previous year’s budget and adding (or removing) amounts to cover inflation and other known expenditures.
- Zero-based budgeting is an alternative to incremental budgeting. It starts by assuming that all departments have no budget and must be built up from scratch for each fiscal period. In addition, all expenditures must be justified considering their estimated benefits.
- Rolling budgeting uses a budget that is updated by adding a new accounting period when the previous period comes to a close.
- Activity-based budgeting consists of recording and analysing key business activities and their associated costs.
- Results-based budgeting consists of assigning financial resources to goals, whose results are analysed using performance indicators, in order to optimise the effort-outcome ratio.
The table below analyses the advantages and drawbacks of each budgeting model:
These strategies are not mutually exclusive—rather, they are complementary. Multiple models can be used depending on the type of budget and budgeting environment.
4. What budgeting model or strategy should I choose?
Latest market trends show that organisations are turning to zero-based or results-based budgeting strategies. This is a result of the advantages of these models, which include:
- encouraging budget alignment with a company’s strategy,
- allowing a high degree of adaptability to change, and
- contributing to eliminating superfluous, recurring expenses.
However, how exhaustively a budget will be monitored and controlled not only depends on the budgeting strategy, but also on the complexity of the model and size of the teams involved.
In other words, a model’s success depends on the balance achieved between the degree of control and effort involved. The search for efficiency has led organisations to implement hybrid models that combine different budgeting strategies, as well as to draw additional support from predictive models (such as machine learning, artificial intelligence, etc.).
In forthcoming articles, we’ll take a closer look at strategies for addressing different budgeting models.
As experts in budget management and SAP technologies, at NTT DATA we offer consulting services that adapt the strategy to the individual client, identifying the most suitable solution for any given scenario. We provide global services covering the entire value chain, from defining strategies to implementing and maintaining solutions, tailoring our services to best meet the needs of each of our clients.
References
https://www.sigmaconso.com/en/blog/what-are-the-steps-in-the-budgeting-process
https://blog.spendesk.com/en/budgeting-process
https://corporatefinanceinstitute.com/resources/knowledge/finance/budgeting/
https://getdivvy.com/learn/business-budgeting-methods/
https://blog.trginternational.com/what-are-the-most-common-approaches-to-budgeting
https://freebalance.com/en/blog/pfm/what-is-performance-budgeting/
Boletín oficial del estado BOE-112_Control_del_Gasto_de_la_Administracion_del_Estado.pdf
Author: Marc Labrude
As a Spain-based SAP consultant and budget management expert with more than 15 years of experience, Marc has been involved in migration projects, rollouts and providing maintenance services in the public and private sectors, both in Spain and internationally.
