Economics/Business

What is budget planning/types/importance/what to consider/how to make

Budget planning projects expenses, revenues, investments and costs of a company to support the decision-making process that will allow the achievement of goals.

One of the pillars for a company’s success is its financial health. With this, the importance of budget planning is highlighted, a management tool that every entrepreneur needs to know.

The verb “plan” has to do with designing a scenario or programming for something in the future. 

With this in mind, we can say that the purpose of budget planning goes beyond recording a company’s cash flow.

Dealing with finances can be challenging, especially when it comes to business management. 

Knowing this, we hope that this post will help you understand the importance of facing this planning and how to do it.

What is budget planning

A more direct way we have to explain what budget planning is is to say that it is a budget control tool that is based on forecasts based on history, company objectives and some other factors.

It is interesting to think that this planning works as a kind of reverse accounting. 

Any type of business, regardless of its size, needs to balance its expenses and income, something that usually happens at the end of each month.

That balance sheet is accounting, a follow-up of the cash flow that happens after expenses and gains have occurred. 

Differently from that, budget planning does not wait for the movements to occur, but projects or simulates this reality.

If you do a work at home, ask the engineer and other professionals for a quote so that you have a cost estimate, right? 

This is the principle that should be brought to your organization, also considering the expected revenue for the period.

That is why we say that budgetary financial planning is an instrument that avoids risks and allows the best use of profit opportunities.

Without this tool, an entrepreneur does not know the reality of the business itself and may have difficulties to avoid losses or to promote the company’s growth.

Planning can be understood as fundamental to support the decision-making process.

The composition of budget planning

For you to understand even better what budget planning is, let’s briefly go through the four factors that form its basis. Look:

  1. costs ― all the expenses that the company has to produce;
  2. expenses ― expenses related to the maintenance of the business;
  3. revenue ― all the money that the company estimates it will receive in the period covered by the budget planning.

Valid for money linked to the sale of products or the offer of services, arising from miscellaneous receipts and others;

  1. investments ― the money that the company will take out of cash to pay for infrastructure improvements and the like.

Budget planning and management

Still, just to give you a broader understanding of the subject, we need to reinforce that planning is just one of the phases of business budget management.

In total, there are four distinct phases , namely:

  • the budget planning itself;
  • simulations of possible scenarios;
  • monitoring of the designed budget;
  • revisions to the plan made.

The types of budget planning

When we talk about what is business budget planning, we need to complement with the fact that there are different types of plan. 

Here we highlight the main existing ones. Keep reading to check it out.

static planning

It is one that remains unchanged regardless of the company’s results . 

Let’s say, for example, that your organization has stipulated the amount of R$ 3 thousand to invest in digital advertising.

Following static budget planning, this amount could not increase even if the company realized that advertising is giving good returns and that it would be interesting to invest a little more in it.

In general, this type of planning is used by large companies because it makes it easier to keep track of money in all their departments. 

Thus, even if there is a “stuck” in the budget, it makes resource management easier.

It is worth saying that having a static plan does not mean reviewing it only at the end of the year, ok? Generally, quarterly or semi-annual reviews are carried out.

flexible planning

We assume that you are already figuring out how flexible planning works. 

Unlike the previous type, this budget planning allows for room for changes in the budget division .

This flexibility applies to the organization’s employee and operating expenses. 

If at the end of the year, for example, your company needs to sign temporary work contracts, it is this type of planning that will create room for this to be possible.

The interesting point is that this type of budget planning manages to keep up with some variations that impact the company’s reality. 

On the other hand, flexibility imposes more frequent monitoring of the plan so that adjustments are made, avoiding surprises or bottlenecks.

continuous planning

The word “ongoing” refers to the frequency with which the financial planning budget is reviewed. 

The idea is that, at the end of each month, the company reviews the plan made and adds another month, keeping a total of 12 months planned at all times.

With this, the idea of ​​continuous planning is to ensure that the company has a budget that is always up to date , preventing new definitions from taking time to be made.

This is positive because it helps the organization to maintain a more realistic budget plan, better suited to the reality that is being lived. On the other hand, continuous review takes time on a monthly basis.

adjusted planning

As the term implies, an adjusted budget plan is one that allows adjustments to be made from time to time to ensure the company’s financial health.

Let’s consider that the company has set aside a monthly amount of R$ 1,500 for investment in advertising. 

At the end of the first quarter of the year, he finds that he spent R$ 6,500 instead of the R$ 4,500 forecast and, with that, he understands that he needs to adjust the budget for the rest of the year.

This type of planning is interesting, because it allows for revisions that adjust expectations based on reality, but it also requires more time available for it to be well executed.

matrix planning

Matrix budget planning is one that crosses, in a matrix, data related to income, expenses, costs and investments , considering a subdivision by departments.

Each person must be responsible for a department at the head office. Some examples are logistics, communication, training and salaries.

So, if the person responsible for the logistics budget sees that demand has been higher than anticipated, as well as spending, they should identify departments that spent less to balance the total budget.

This type of budget is interesting because it contributes to a more careful evaluation of the use of resources. On the other hand, it can generate disputes over company resources.

zero-based planning

Something that we haven’t highlighted yet about budget planning in companies is that most of them consider it historical.

This means that it relies on data from previous periods to project future ranges.

The zero-based budget deviates from this pattern and does not consider the organization’s history of costs, expenses and income . 

The idea is to prevent a reality that may no longer apply from having an impact on the planning to be done.

This helps managers to be able to plan a more efficient use of resources, combining finances with the company’s strategies. 

On the other hand, this planning may require a lot of time and training to be carried out.

We want you to keep these six types of planning in mind, so we’ve summarized them. Check out!

Why is it important for companies

Choosing the ideal type of budget planning needs to take different factors into account, such as the company’s operating segment, its size and its financial maturity. 

It is for this reason that this definition may require the guidance of experts in the field.

Regardless of the choice made, when well developed, a budget plan has everything to positively affect the business and that’s what we’re going to talk about now. See below for a list of advantages and their explanation.

1. Financial organization

Ensuring a financial organization is essential for a company to be able to maintain and continue to exist.

There is little point in hiring a highly qualified team and investing in marketing to promote the brand, for example, if, in the end, the financial lack of control will take all the effort down the drain.

As we said earlier, a company that doesn’t know its finances doesn’t know its reality.

Therefore, budget planning is essential for decisions to be properly grounded.

2. Resource optimization

Based on what we’ve seen so far, another advantage of budget planning is the possibility of keeping finances allied to the company’s strategies and, thus, making better use of resources .

Earlier, we gave the example of a work at home to indicate how natural a search for cost forecasting is or should be — and, especially in the case of companies, for revenue forecasting as well.

We come back to this example to ask how many times you had to deal with or knew about a work that ended up going over budget. 

This is very common and, as much as the level of predictability in your organization is higher, the chances that things don’t go as planned exist.

What we mean by this is that any business may need to review its use of financial resources. 

Budget planning helps to make adjustments not only to cover expenses, but to ensure better use of money and increase profits as well.

3. Transparency

It’s good to think about the future and envision growth, increased profits and a lot of success, isn’t it? 

Despite this, we all know that entrepreneurs can have their ambitions, but they need to keep their feet on the ground.

If you base your company’s decisions on guesswork or just your expectations, you may end up negatively surprising yourself. 

The same goes for those who have a simple financial organization and who are not so concerned with designing finances seriously.

In short, budget planning allows the company to have more clarity of its possibilities based on weaknesses as well as strengths and opportunities.

With this, we can say that the strategic decision-making process becomes more realistic and safer thanks to the transparency that the plan provides.

4. Easier management

Last but not least, we point out that business budget planning leads to detailed expense calculations.

This favors financial management for a more adequate distribution of resources.

If the company can understand where it spends the most and how much money is invested, it can better understand its needs and even review the investments that are being made. 

Thus, it can better manage its resources, defining a more intelligent and effective application.

What to consider for budget planning

Something you need to know about budget planning is that there are guidelines, but there is no ready-to-follow formula , because the plan needs to be adapted to the reality of each company.

With that in mind, you should consider your organization’s needs and characteristics, because something that is more relevant to your business may be less critical to another.

Namely, a financial plan consists of:

  • sales planning;
  • projection of sales deductions;
  • production cost budget;
  • personnel expenditure budget;
  • operating expense budget;
  • investment budget.

It is you, possibly with expert guidance, who will define the weight that each factor will have in budget planning to create something unique for your organization.

Let’s assume, for example, that your company needs to seek to reduce costs so that it can get enough resources to invest in its development.

If the organization has its largest share of spending on wages and benefits, it may need to review this issue by optimizing its benefits management in a way that does not harm workers and improves the use of money.

On the other hand, if salaries and benefits are well managed , but the company has not reviewed its production costs for a while, it may be time to evaluate supplier agreements and other factors that impact spending.

All this without mentioning the revenue projection and what the company identifies that it can change to generate more money. 

This is another unique point, that is, it varies from organization to organization and can be decisive for intelligent organizational financial planning.

How to make a budget plan

With all that has been said, you have what you need to understand how to carry out budget planning in your company based on the tips that we will present below. Check out!

Know your company

At times, we mentioned factors such as the size of the company and its degree of financial maturity as being relevant to budget planning.

It may seem needless to say that you need to understand where your own organization is in order to come up with a budget plan, but we do it anyway. That’s because there is no achism here.

With regard to the size of the company – which can be micro, small, medium or large – the definition criterion is annual revenue and not the number of employees. 

Eventually, an organization may need to go through a reframing process if it starts to earn more or less than before.

Talking about this is relevant to our conversation about budget planning, because companies of different sizes can have different tax obligations . Something that therefore affects your finances.

In turn, the degree of maturity concerns the acquired ability of a company to transform its knowledge into practical day-to-day solutions. 

Companies can be classified as startups , emerging companies, expanding companies and mature companies.

And this can also impact planning as it is a factor capable of influencing the objectives and needs of the business at the moment.

Analyze reality and expectation

There are three little questions that can guide the realization of smart budget planning. 

They help to promote an alignment between current reality and expectations for the business:

  1. where is the company today?
  2. Where does the company need to go?
  3. What will be done for the company to get where it needs to be?

This questionnaire can be enriched with other questions that make sense for understanding the organization’s financial landscape. 

The idea is that you have supplies for:

  • define the goal plan for the established time interval;
  • prepare a sales projection for the same period;
  • indicate what are the costs related to production;
  • indicate what the personnel expenses are;
  • point out what the operating expenses are;
  • set an investment budget.

More than structuring the budget planning all at once, what these questions and answers will provide is the expansion of the understanding of what exists and what can be done.

Discover the fundamentals

Budget planning needs to be based on the company’s finances . 

Therefore, there are elements that can be considered fundamental to its realization. Look:

  • monthly budget ― as you may know, having a monthly budget contributes to the good management of inputs and outputs, that is, of all financial transactions that take place in the company;
  • annual budget ― the planning must also include projections capable of indicating how the company’s financial resources will be used throughout the year;
  • cash flow ― cash flow is a basic instrument to be used to control and plan finances in order to ensure that the organization always has available working capital.

Collect data and use tools

When we present the main types of budgetary financial planning, we emphasize that only the zero-based budget did not start from a history.

The collection of data is usually essential for carrying out the planning, including allowing the generation of three reports that are of interest to your company: Projected Income Statement, Cash Flow Projection and Balance Sheet Projection.

To present each one in a very simple and direct way, we can say that:

  • the Projected DRE indicates how much profit your company will be able to generate;
  • the Cash Flow Projection, in turn, shows how much cash the company will have in cash to meet its commitments such as paying salaries and costs with suppliers;
  • Finally, the Balance Sheet Projection indicates how much wealth the company will accumulate in the period stipulated for planning, whether or not it has equity expansion.

The idea, therefore, is to have enough foundation to make an adequate projection for the company’s finances and, consequently, for decision-making.

Simulate scenarios

Budget planning needs to be realistic, but that doesn’t mean that possibilities should be totally disregarded for its realization.

Having a plan is having what you need to face a situation even if it doesn’t go according to plan. 

Thus, it is important that your company simulates possible scenarios, from pessimistic to optimistic , so that the directions to be followed in each case are defined.

It is worth bearing in mind that responding quickly to bottlenecks and setbacks, as well as seizing opportunities while there is still time, is critical to business.

Count on experts

Finally, a tip that can be followed as a starting point for carrying out your company’s budget planning: the appointment of specialists to assist in the various stages of the process.

Gathering all the information, doing all the analysis and projections can be challenging. 

Considering that planning will guide an entire period of the company’s life, even if revisions are made, it is necessary to have something consistent.

For this reason, having professionals or a company specialized in financial management can make all the difference.

Best practices for budget planning

Yes, carrying out a budget planning can be complex and involve some demands that deserve attention even if your company has specialists.

Whatever the case, we have some good practices that can make the process more productive and guarantee better results. Let’s go to them!

Bet on meetings to set the budget

Unless you are a one-person company, organizing meetings to set the budget may be necessary. 

In fact, the larger the company, the more evident this need becomes from the point of view of several areas.

The idea is that managers from different departments have the information they need to help with the budget planning process . 

This is because, by experiencing the day-to-day of the sector, they are able to better indicate what the costs are, how investments have been made and whether they are adequate to current demands.

As close to the reality of each department as a CEO tries to be, getting to know their demands can be complicated. 

Betting only on one’s own perception of the costs and revenues of each sector can be risky, leading to erroneous projections and poor distribution of resources.

As it should be, however, it is no use for each manager to arrive at the meeting saying that his department needs X thousand reais per month, quarter or whatever the period.

Senior management will still need to be guided by this information to understand how to meet the needs and maintain the company’s financial health. 

Something that leads us to suggest that you don’t rush too much into this definition and analyze the numbers carefully.

Set deadlines for completing budget planning

It is important that your company holds as many meetings as necessary to align demands and possibilities. 

Despite this, it is necessary to set a deadline for the budget planning to be completed.

It is imperative that this is done, because planning is strategic and if it is not ready in time to guide the company’s decisions, it will result in undervalued effort .

Consult financial management experts about the data your company needs to have at hand to carry out financial planning. 

Inform managers who have access to this information and set a time limit for sending data.

Lean on history and benchmark

The next best practice for doing budget planning involves looking in and out of your company’s private universe.

First, unless you’ve opted for zero-based budgeting, your company will need to look at the history of costs, expenses, income, and investments from previous years. 

The idea is that this data will help in understanding patterns and defining projections.

It turns out that it is not only internal parameters that must be considered. 

Budget planning has the potential to drive a business to success, so it doesn’t hurt to observe how competitors are organizing themselves in this regard.

With all this, with standards and the appropriate comparisons, your company can identify opportunities to reduce costs or reallocate resources to increase the chances of profit .

Define metrics and track results

Once the budget plan is ready, the company can stop dedicating itself to it until a new plan needs to be done, right? Wrong!

No planning works like a crystal ball and, therefore, it is necessary to monitor the financial situation of the company to know if the projections made are coming true or not. Something that counts for expenses and income.

To do so, the ideal is to define some metrics and monitor them closely on a monthly basis. 

This strategy will allow for adjustment needs to be identified in time , for the company to have no surprises and for future budget planning to be even more assertive.

Review and redraft of budget planning

If budget planning needs to be followed up even after it is ready, nothing more natural than to expect that, depending on the scenario, revisions and even redoing appear on the horizon.

When to review the plan made

Understand that planning review is normal. This is something that can even be programmed to happen based on the type of budget plan you choose for your company.

As we have seen, there are plans that require monthly revisions, but there may also be definitions that the projections are analyzed on a bimonthly, quarterly or other interval that makes sense.

In addition, it is interesting to note that if a scenario different from the projected one is perceived, the company does not need to wait the defined interval to review the planning.

Whether due to possible problems or possible opportunities, the review can be crucial for the company to achieve its goals.

When to redo budget planning

The reworking of a budget plan is something more dramatic and one that is expected not to happen. 

The chances that this movement will be necessary are small when the plan is well carried out and properly monitored.

However, we cannot ignore that atypical situations can happen and demand a reformulation. 

As an example, it is worth bearing in mind the context of the covid-19 pandemic that turned the lives of entrepreneurs in the country upside down.

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