In economic value creation, the budget is a compelling factor in achieving goals and objectives. It is a critical tool, a means to an economic end. The size and level of budget autonomy, as well as the accountability of managers for performance, engender both cerebral and emotional responses that can either ignite or dampen enthusiasm, passion, and motivation.
At times, budget requests are approved; at other times, they are met with resistance and questions like, "What do you need that for?" accompanied by lectures on the urgency of cost savings. Similarly, government budgets become politically contentious when cuts or realignments are proposed.
As we navigate economic and political turbulence, allocating and competing for scarce funds are necessary execution strategies to sustain or overcome the environmental challenges businesses face. Effective budgeting is crucial.
Management allocates and uses resources to carry out essential business activities and achieve its goals. Some key questions must be answered: What are these activities? Are they core to the business value proposition? Do they create, contribute, and add value to the company's customers? Do they improve operational efficiency and effectiveness in revenue generation?
More to the point, do we have the resources and the budget to carry out these activities? How much should we allocate to them? What is the cost of funds? What activities should we prioritize and finance? How do we measure performance?
No matter how important these activities are, if funds are unavailable or difficult to obtain, it can hinder and jeopardize the short-term and long-term achievement of corporate objectives.
Overall, the company's ability to answer these questions effectively rests on a clear definition of its mission, vision, and strategy.
Budgeting is a major component of integrated corporate planning. It is not an isolated or ad hoc activity, nor simply a routine procedure performed annually. To add value, it should be value-based, with priorities clearly defined and budgets judiciously allocated to enhance the economic enterprise.
A budget is a financial expression of management plans and programs expected to drive business results. It is a quantification of corporate plans and programs, a scorecard for performance evaluation, and a commitment to action in achieving corporate objectives.
Budgets must be future-proofed with robust risk management strategies that are nimble and agile to enable resilience and option development in the face of volatility, uncertainty, complexity, and ambiguity (VUCA). During uncertain conditions, budgeting enables value creation and minimizes the impact of risks on resource utilization.
As a plan, a budget prioritizes value-creating activities. It is analogous to a blueprint for building a house. Without a plan, construction may suffer delays, design flaws, or cost overruns.
As a scorecard, it provides a standard for comparing actual performance, enabling analysis of variances for corrective action and feedback. It enhances critical thinking, problem-solving, decision-making, and employee motivation.
A budget represents a personal commitment by individual managers and their units to achieve the desired objectives. To foster commitment and ownership, they must play a significant role in budget preparation and be accountable for its achievement.
A budget is a commitment of resources. When management decides on an action plan and allocates financial resources to it, those resources are committed. This commitment carries costs, including the cost of foregone opportunities, the cost of financing, and the cost of accessing financial markets.
A budget is also an effective communication channel because it requires coordination and cooperation among cross-functional groups and managers. It enhances transparency, teamwork, and mutual support across the organization.
In the middle of last year, my management team successfully completed the budgeting cycle after three months of interactive activities, culminating in an off-site conference for the kickoff. My executives and managers presented their targets, strategies, and action plans and committed to their accomplishment. I observed an unprecedented level of enthusiasm and motivation within the team, proud and assured that our corporate goals were within reach. Today, the actual financial and operating results are exceeding expectations.
Ultimately, the budgeting process is most effective when it receives unequivocal support, encouragement, and mentoring from corporate leaders who champion employees' collective efforts toward achieving team goals.
Dr. Cesar Azurin Mansibang is the President/CEO of United Graphic Expression Corporation, a Graduate School Professor, management consultant, Dean of the College of Accountancy of Dr. Yanga's Colleges, and former PICPA Senior Member of the Board of Directors, VP for Operations, and VP for the Education Sector.