Budgeting Red Flags

Every manufacturing firm, retail store, service company and governmental agency should have an operating budget. In essence, an operating budget is the quantification of a company’s business plan. In order to create a functional and realistic operating budget, it is crucial to use marketing planning, product planning, capital planning and financial planning in the budgeting process.

An operating budget includes a company’s income and cost objectives for a certain period in time. Commonly, an operating budget sums up a year divided out by months. If a company isn’t meeting its projected budget goals, this is the beginning of some warning signs that troubled areas exist. In this way, the operating budget serves as a control device as well.

Budgeting Red Flags

The following are indicators of a budget’s ineffectiveness.

  • Lack of participation by all levels of management

When the budgeting responsibilities are dictated from upper management alone, a lack of ownership ensues among lower management. In addition, those with their feet in the trenches aren’t given opportunity to offer their valuable input in regards to the practicality and feasibility of an operating budget.

  • Management’s neglect of a budget review

It is only the first step to develop an operating budget. In order for all levels of a company to benefit from one, the budget must be regularly reviewed and evaluated.

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  • Uncorrected variances

Even regularly reviewing and evaluating the budget isn’t enough. When variances between planned performance and budget objectives are detected, they must also be corrected. If large variances exist, they may be due to poor budget estimates, poor feedback, lack of timely, corrective action, or ineffective policies for budget maintenance.