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Budgeting Principles

For those who have the task to develop budgets or to be involved in the process of developing budgets, it is important to have a good knowledge of budgeting principles that can make the difference in the financial health of the organisation. Failure to engage in sound budgeting processes would rank as one of the main reasons why companies and organisations fail.


Be conservative not optimistic

Principles of budgeting: Don't be optimisticThe first principle of budgeting is to avoid budgeting on the basis that everything will turn out as expected. Be very cautious about optimistic forecasts. Try to build in a safety factor by tending to underestimate your income and overestimate your expenses. There will always be unexpected events and therefore a common strategy in developing a budget is to insert an additional expense called "contingencies". This item in the expense budget is an insurance policy against the unforeseen.


Team work and consultation

One of the most important principles of budgeting is that it requires teamwork and consultation. Although one person may be responsible for the overall compilation of the budget, one person should not be responsible for all the work involved. The task of budgeting should be split and allocated among those individuals who have the best chance of knowing what expenditure is likely to be needed and what income is reasonable to expect. Involvement by many people in budgeting might slow the process down, but the answer is far more likely to be accurate and dependable.


Allow plenty of time

Budgeting is not an activity that is completed in a few hours. A good budget may be worked on for several weeks, if not months, adding and changing figures as new information comes to light. For this reason, budgeting is often referred to as an iterative process. The budgeting process is lengthy because much research and consultation has to be carried out before people involved in the process can be confident of the figures they supply.

Iterative process of budgeting


Excellence in documentation

It is very important that the author(s) of the budget strive to produce documents that can be read and understood by anyone. If budget workings are unclear and figures are not clearly labeled even the author will, as time passes, have trouble understanding where the figures come from and how the calculations were made. It should be assumed that budgeting workings will be:

  • Circulated to many different people who may have lower levels of financial literacy
  • Useful again in a year's time when the budgeting process begins again. Unless workings are well labeled it may be difficult to remember.

Example of labeling:

illustration of good labelling on budget workpapers

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Provide Training

Ensure people who have a significant role in the budgeting process have a reasonable understanding of the principles of budgeting, how it relates to the strategic and operational plans, and how everyone must live with the consequences of the finalised budget in the year ahead. Training need only be a single meeting in which those who have experience of budgeting provide knowledge to others involved who are less experienced.


Get Sign Off

Another one of the important principles of budgeting is to ensure that all persons formally involved in the budgeting process agree to the final iteration of the budget. This agreement by those involved is often referred to as the "Sign Off". In other words, those involved add their signature to the final iteration of the budget. This ensures that there will be no argument later about who agreed to what.


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