The budget cycle is a key moment for companies, as it determines for a large extent where your resources will be allocated. You want to make sure you base your decisions on the right input. Often, companies solely work with internal knowledge and assumptions. This can be improved by incorporating benchmarking during the budget process. But which steps should you follow during the budget cycle?
What is the budget cycle?
The budget cycle describes the steps that a company should follow in order to develop a budget. The budget is an estimate of the income and expenses that a company expects to incur in the future. Because the whole process integrates research, data, and estimates, following the budget cycle makes the entire process intelligent and accountable. The budget cycle provides a roadmap for how the company’s resources will be allocated to achieve its strategic goals without going over budget. In other words, a budget acts as a guide to how much money to spend and for what purposes.
The 4 steps of the budget cycle
Follow these 4 steps for intelligent and accountable allocation of resources during the budget cycle:
Step 1: Preparing & Submission
The first step in the budget cycle is the preparation of the budget. Based on the strategic ambitions, there will be determined where resources are going to be allocated. During this phase, department managers and budget holders will make plans, prioritize spending, crunch numbers and develop a preliminary budget plan. These steps may be repeated before a preliminary budget is developed that can be submitted for the approval phase.
Step 2: Approval
In the second step of the budget cycle, the submitted budget is presented to stakeholders (e.g. shareholders, supervisory board). A budget may move back and forth for edits and corrections until all parties approve the document. Here, it often comes down to determining the final targets with the right balance of being realistic but still ambitious.
Step 3: Execution
When the budget is approved, it has to be implemented by carrying out business activities in accordance with the budget. The execution of the budget usually starts with the beginning of the accounting period. Monitoring and control of financial activities take place during execution. If revenues and expenses do not conform to the budget, the necessary adjustments are made as the budget is implemented.
Step 4: Evaluation
At the end of the budget cycle, a company must regularly evaluate the budget. A regular review helps to make timely adjustments to the budget based on internal and external factors. A final evaluation of the budget is done after the end of the accounting period. This includes recommendations for the coming year and provides overall feedback on the budget.
How benchmarking can improve the budget process
By benchmarking your own performance against the competition, you can see where your company can improve and become more competitive. Especially during the budget process this can help to:
Create a common view on performance
With a benchmark, you create one common view of how you are performing compared to the competition. You make sure that everyone is aligned and works from the same starting point.
Determine your focus points
A KPI benchmark shows in which areas you are performing well and where you can improve, or become more competitive. Determine the right focus points that align with your strategic ambitions.
Add context to the briefing
With the right briefing for budget holders, management is able to define ambition levels and challenge the company. A benchmark will give context to the what and why behind the briefing.
Check & Challenge the budgets
A benchmark helps finance and control to check the budgets. Are they realistic but still ambitious? Is something missing? It gives them the tools to fact check and challenge growth assumptions.
Easier and faster approval
Often, the budget goes back and forth, as stakeholders want higher targets, while budget holders try to work them down. Benchmarks provide reasoning to determine & approve the final budgets faster.
Want to read more about the budget cycle ? Download our budget cycle use case below and get more insights into the benefits of benchmarking and why you should benchmark during the budget cycle.