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Five Common Misconceptions
No. 3: Budgeting Is Just A Numbers Game
Budgeting does involve numbers; but, it is hardly a game (although it might appear so if an organization has a very immature budget process). Simply stated, budgeting occurs in two phases: (1) preparation and approval (i.e., getting the money), and (2) execution (i.e., spending the money).
Budget preparation involves every part of an organization. From the chief executives office to the janitorial services, every functional area prepares and submits requests to fund routine and non-routine projects and activities for the next year. It is important to understand that, in this process, information technology is just one more functional area asking for money.
At this stage, the numbers reflect the operating plans and proposals for the entire organization stated in terms of their estimated costs (and revenues, for income producing functions).
Senior management evaluates the revenue plans and proposals, weighs them against expenditure plans and proposals, and decides how much can be spent and where. The result is the budget. In fact, there are several budgets: (1) the expense budget (money to fund normal operations), (2) the revenue budget (where the money will come from), and sometimes (3) the capital budget (money for non-routine work, e.g., projects).
For all practical purposes, the approved budget represents 100% of the money that an organization plans to spend (and receive) during the next budget period (typically, one year). Money has been apportioned among functional areas; within each functional area, money is allocated among routine and non-routine activities - often, on a position-by-position and purchase-by-purchase basis. The bottom line is that every dollar that is available to be spent has been linked to a specific expense item (e.g., from the network administrator that you proposed to hire in three months to the software license you proposed to buy next month).
In order for an organization to get the amount it needs to complete its work for the year, project planning and justification take on a vital importance. The plans and justifications, which include operational elements (what will be done, when it will be done, etc.) as well as costs, influence whether funding is granted or not. Organizations that develop the most compelling proposals and justifications, and demonstrate alignment with strategic goals and business objectives, significantly improve the odds of receiving the necessary funding.
During the execution phase, management monitors and controls spending to assure that it conforms to approved plans; if it does not, projects may be suspended or canceled, and dollars may be reallocated as a result. Budgeting is not just a numbers game!
What Every Manager Needs To Know About Budgeting, Lesson 4 of 14