The budget remaining at the end of the year? What happens then? First, understand what a budget is not. It is not a bucket to accumulate funds for various activities. Nor is it a straitjacket, or a diagram to show what we can’t do. A budget is a highly directed tool designed to achieve specific goals. It is our best estimate of the time, talent, and money needed to achieve specific goals. Again, the budget is not money to be spent irresponsibly as the end of the year approaches.
We budget to try to ensure that we have the resources to meet our goals during the budget period (usually one year). We don’t focus on the remaining budget in isolation at any one time. Instead, we look holistically at the goal and the resources needed to achieve it.
When we budget, we start with goals and then calculate the resources we need to achieve those goals – time, skills, and money. Once we have achieved the goals, the budget expires, even though we still have a budget left. This is the only way to avoid silos and encourage the efficient use of resources.
Budget remaining after goals are met should be reallocated
After meeting our goals by the end of the year, we must not be profligate like governments and find creative ways to waste the remaining budget. When we reach the goal(s), we do not spend the overestimated funds. We don’t know the future, so it’s reasonable that we didn’t budget correctly. “Put the funds” back into the “central reserve” to optimize them in the organization. Conversely, when we underestimate, we need to re-examine our goals and, if necessary, request additional funds or modify the goals to stay within budget.
One reason governments waste taxpayer money is that they focus only on money – the size of budgets – instead of goals and programs, and the best ways to achieve them. Another reason is that they get away with it and we expect governments to be profligate and inept.
When we set the budget, we must choose the best path to the goal while identifying potential gaps and opportunities that may arise during the budget period. This approach is obvious, but many people don’t follow it. They either don’t prepare a budget, or they do so after they have begun their journey. Or they focus on the money regardless of their goals. Thoughtful budgeting before the event allows us to examine alternatives to show likely paths to manage gaps and potential opportunities.
Budgeting is about setting the budget – choosing the plan and methodically estimating and recording its cost to achieve a specific goal or goals. It is the writing of the roadmap and financial map, the planning, and evaluation of PEACE budget control, the step of counting costs before acting.
Budgeting is an iterative process
Budgeting is iterative. We must go through a few cycles to prune projects and reduce tasks to bring expenses down to available revenues. This is a standard procedure and is the only way to stay out of debt with a fixed income. Don’t cut costs (especially in general). Cut programs and tasks and the associated costs will disappear. When we cut costs, we don’t focus on the objectives (programs and functions) and therefore we will underfund some and overfund others. In addition, irrational cost-cutting encourages games where people submit high budgets knowing that management will cut them. As a former CFO, I’ve seen these games that don’t benefit the entire organization.
The reason we need to budget should be obvious. Yet, I will repeat it. We budget before a scheduled event to see if we will have enough funds to meet our goals. Don’t just look at what has been spent in the past and increase that number to get a budget. Instead, decide on the goals for the budget period first. Only after we develop the goals do we put a number on them?
Example of budgeting
Let’s say you are planning to go to Vancouver (your goal) and you estimate that you will need to go to the United States.
Go home and not go to Vancouver.
Go to Vancouver but stay for less time, or stay in cheaper places, or cut back on things like food, sightseeing, etc.
You could end the trip with borrowed money.