Where do Budgets Fit In?

There is quite a bit of overlap between the budgeting process and the forecasting process which was discussed in the previous Learning Unit. The following diagram illustrates, generally speaking, where budgets fit in:

Business unit managers are usually required to report on their progress against their budget each month. This is done by comparing actual spending against budgeted targets. At the End of the budget year, organisations usually conduct more comprehensive comparisons. Often organisations use end of budget year comparisons as performance measurements to reward or “punish” employees, however a better approach would be to incorporate the budget measurement tools with other forms of measurement to reduce the risk of turning budgets into harsh, bureaucratic management tools.

Figures from budgets should be evaluated in conjunction with other organisational elements. These include customer perceptions, strength of processes and ability to innovate. This is sometimes referred to as a “Balanced Scorecard Approach”