Budgeting Process Steps | Managerial Accounting

What is Budgeting?

A budget is a financial plan which considers income and expenditure. At its basic level, budgeting is something which we all do. We may not formulate complex budgets on a spreadsheet, but we all plan how we can save up for something or how we can afford to cover our expenses in the following month.

Budgeting can be formal, where you can see the numbers in black and white, or informal, where individuals create a mental calculation.

The budgeting process is simply translating a situation or plan into numbers. We examine the impact of an event or a process in the future. It is important to remember that budgets are estimates; they are targets that we would like to achieve. Just because an organization or individual creates a target, it does not mean they will actually achieve it.

The steps taken to form budgets will depend on the size of the organization; the process discussed in Figure 1 often relates to medium and large-sized organizations. In such organizations, there are more resources and multiple levels of management involved.

The process of creating and using budgets should directly relate to the needs of an organization. What is relevant for one organization may not be relevant for another. For example, some organizations will have a budget manual that would include the processes and requirements, but others will not.

A budget manual is a document explaining how all the budgets relate containing information on coding items within the budgets.

The budgeting process typically consists of six steps that are summarized in Figure 1.

budgeting process typically consists of six steps

Although figure 1 shows the process as linear, in reality, this is not always the case. Some of these processes will take place at the same time, following negotiation. It is sometimes necessary to return to one of these stages.

Reviewing stages can occur because new information is established. It is also important to understand that the detail of these processes, as described in Figure 1, may not be the same in all organizations.