A contribution by Dr Christian Wurditsch - Entrepreneur, Investor, Business Angel

Budgeting is important and easier than expected

(or what a budget or financial plan has in common with a hiking map)

Fact box for those in a hurry:

• Budgets are important
• Anyone can plan their finances
• Realism is a key to success
• Software supports immensely

What is budgeting

Is the question "What does budgeting mean?" really that simple to answer? We say yes! It is also known synonymously as budget or financial planning and is the business planning process used by economic entities to create a budget. Budgeting is the definition of certain targets that are to be achieved within a planning period (usually one year in companies).
The aim is therefore to depict the planned future in the form of figures and to record it in a financial framework. These are drawn up for private households (budget plan), companies (budget) and public institutions, from municipalities and federal states to the state/federal government (budget) and form the basis for measuring performance and monitoring success. performance measurement and performance review.

What are the different types of budgeting?

There are a number of different options, create financial frameworks. Here are a few examples:

• Operational budgeting
• Strategic budgeting
• Retrograde budgeting (top-down)
• Bottom-up budgeting (progressive)
• Countercurrent method
• Divisional budget planning
• Program-related budget planning
• Zero-base budgeting

There are also fixed and flexible budgets. Classification features such as the budget unit, the default size, the reference period, the flexibility and the calculation method result in further variants.

Let's take a brief look at the special features of the examples.

Operational budgeting

The aim of the operational process is to prepare short-term budgetswhich serve to plan and control the available resources Cash position for a period of generally up to one year.

Strategic budgeting

In contrast to operational planning, strategic budgeting is used to create long-term financial plans. long-term financial plans. The targets and objectives are set for a period of up to ten years.

Retrograde budgeting (top-down)

With centralized retrograde top-down budgeting, the preparation of the budget begins with the company management and is broken down to the smaller organizational units.

Progressive budget planning (bottom-up)

With the decentralized progressive financing framework, budget preparation begins in the smallest organizational units. smallest organizational units in the form of sub-budgets or sub-plans (sales, turnover, personnel, investment, liquidity, material, marketing plans, etc.) and is consolidated at the top level into an overall budget. overall budget (aggregated) at the top level.

The countercurrent method

The countercurrent process combines the retrograde and progressive process are combinedto utilize the advantages of both types of budget planning and eliminate weaknesses.

Divisional budget planning

In divisional budget planning, the available resources are generally used as a basis. existing resources resources. This is referred to as input-oriented budget planning, which is usually based on past experience.

Programme-related budget planning

Program-related budget planning is generally based on the goals to be achieved. objectives to be achieved. This is referred to as output-oriented budget planning, in which the resources required for the bundle of measures to achieve the output are first derived.

The Zero-Base

With zero-base planning, in contrast to the usual planning method, the budget is planningwhich is based on the current budget, planned from scratch. Each department defines various measures for the coming period and the overall budget is allocated to the respective measures in order of priority. By constantly rethinking the measures, this is a very efficient method.

Now that we've covered the basics, let's look at what you need to know about the actual process and how to create realistic budget plans.

2 questions that we are often asked about the budgeting process:

1. what steps need to be taken for effective financial planning?

Depending on the type of planning, not only different numbers of steps are required to create a budget, but also different steps. For the traditional budget planning ten individual steps are required:

1. Detect changes:
   • Check whether there have been any significant changes in the company, corporate goals, resources, etc. compared to the previous financial plan.
2. Create forecast:
   • Preparation of a forecast of budget-relevant factors on the basis of data from the previous period.
3. Set budget targets:
   • Determining the budget targets for the company based on the data and information obtained in the first two steps.
4. Propose total budget:
   • Proposal of an overall budget by the company management (top-down).
5. Plan individual budgets:
   • Planning of individual budgets by the decentralized planning departments (bottom-up).
6. Passing on budget requests:
   • Forwarding the budget requests of the decentralized planning departments to the next higher instance.
7. Review of applications:
   • Checking budget applications for compatibility with the specified formal targets.
8. Comparison of the plans:
   • Reconciliation of the financial framework or sub-budgets planned or proposed by the company management and the decentralized planning units.
9. Create an overall report:
   • Preparation of an overall report.
10. Examination and approval:
    • Review of the overall report by the company management and approval of the overall budget if necessary.

2. how do I make sure that my plans, especially the all-important liquidity plans, are as realistic and useful as possible?

Take your time to plan - it's a worthwhile investment

First of all, you should clarify why you are creating a financial framework. The answer has a major influence on your attitude and therefore also on the attention you pay to the budgeting process. budgeting process to the budgeting process. This is important for every company. Especially for entrepreneurs, the Cash flow planning is of essential importance. Nobody sets off on a hike in unfamiliar territory without a map or a navigation device. The budget is the company's route plan through the year. You set goals and make assumptions in order to arrive at the end of the year where you want to be as a business owner.

Our expert tipIf you invest time in creating a realistic budget, it will help you to prioritize your operations according to your specifications. In other words, you will know which path to take when you reach a fork in the road. It also makes it easier to determine where you stand along the way. In traditional business management, this is called controlling.

Use the previous year's figures - but only for guidance

A distinction is made between two processes in budget preparation. The top-down process starts with planning from the top and is broken down to all organizational units. In contrast, bottom-up planning starts with partial budgets such as turnover, sales, distribution, production, personnel, investment and Cash flow plan, based on the individual organizational units. These parts are then combined at the top level to form an overall budget. In most cases, the sales plan is usually the starting point.

In contrast to zero-based budgeting (zero-base), the first step in both methods is usually based on the previous year's figures. These are often a good first indication of the expected sales and costs and a sign of efficient cost planning. This is often referred to as a base plan. This should be the starting point for the priorities in the current financial year.

Our expert tip: On this basis, consider your sales plans, what additional costs you are planning compared to the previous year and what investments you would like to make. This will help to motivate and coordinate your decisions.

Make realistic plans - a lot of things will be easier that way

In addition to operational behavior management, budgets primarily serve to identify problems and provide an early warning of bottlenecks. It is therefore important that you strive for a realistic financial plan. No one can predict the future, but you can prepare and usually have additional empirical values. Make sure your plan contains enough information to easily monitor the key drivers of your business such as turnover, costs and working capital.

Our expert tipFollow the 80/20 rule. Invest time in your most important planning items. If you spend less time on smaller or less important budget items, you can focus more intensively on the sales campaign and its impact on the figures. Always bear dependencies in mind. If you want to generate more sales, this usually also leads to higher costs, such as more material purchases, additional external services and more personnel. These aspects should be reflected in the business plan be reflected in the business plan.

Involve the right people - you can get further together

There is often a preconception in many companies that budgets are primarily something for detail-oriented controllers and are annoying or restrictive when working. Entrepreneurs, managing directors, managers and employees often overlook how important it is to march through the company year with a coordinated "hiking map". This shared picture is crucial in order to steer forces and decisions in the same direction during various challenges such as ascents, forks in the road or river crossings.

Our expert tip: Planning should always be a teamwork teamwork. Jointly developed plans are more likely to be achieved and automatically lead to a higher level of commitment. The team understands your priorities and you gain an insight into the thinking of your employees.

Good operational and strategic budgets should above all:

• reflect clearly defined responsibilities.
• be measurable and flexible.
• provide room for maneuver for the person responsible.
• realistic and therefore challenging, as well as achievable.
• team reports and not results from the ivory tower.
• should not be an end in itself, but a guiding framework for important decisions.

Use a tool for support - the added value is great

For plan development and controlling, it is advantageous to have a software tool with practical functions functions. The accounting system is often used for this purpose. However, this has the disadvantage that it usually maps the entire complexity of accounting and is primarily designed to document the past. Business management on this basis is like planning a route when driving a car on the basis of highway toll receipts or fuel receipts, rather than on the basis of real-time data from a navigation device.

Our expert tip: Modern budgeting should be carried out with state-of-the-art support, although Excel is not necessarily one of them. COMMITLY is the flexible, supportive online tool for this. It is intuitive to use, easy to integrate and offers numerous advantages. BudgetingCreate, reject and fix tasks, lists and plans and continuously monitor the achievement of plans - all at the touch of a button.

False myths about budget planning - leave preconceptions to your competitors

• Budgets are out of date:
  • Think of budgets as navigation devices or hiking maps in digital form. They are being used more than ever.
• The traditional budgeting process is time-consuming and inefficient:
  • Pragmatism and modern software solutions reduce effort to a minimum and increase knowledge many times over.
• Taxes on the basis of budgets are paid once a year:
  • State-of-the-art corporate management is based on real-time data and is part of the company's daily success.
• Budget targets set the wrong incentives:
  • Developing financial frameworks as a team creates responsibility and orientation for managers and employees.
• Budgets nip innovation in the bud:
  • Living budgets reveal potential and serve as early indicators for doing things better and differently.

Our EXPERT conclusion

The budgeting is an important process for ensuring the vitality of a company and jointly prepared budgets are of great value in operational management. A modern financial planning software such as COMMITLY allows updates at the touch of a button, collaborative creation and editing of plans and supports the implementation of budgets, for example in the form of forecasts. In comparison, Excel is a relic from the last decade.