Budget remaining at year-end? What happens then? First, understand what a budget isn’t. It is not a bucket to accumulate funds for various activities. Neither is it a straitjacket, nor a scheme 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 time, talents, and money to reach particular goals. I repeat; the budget is not money to spend irresponsibly as we approach year-end.
We budget to try to ensure we have resources to do our goals in the budget period (usually one year). We don’t focus on the budget remaining in isolation, at any point. Instead, we look holistically at the goal and the resources needed to complete it.
When we budget, we start with goals and then calculate resources we need to do these goals—time, skills, and money. Once we complete the objectives, the budget expires, even if we have a budget remaining. This is the only way to prevent silos and encourage the effective use of resources.
Budget Remaining After Completing Goals Needs Reassigning
After completing our goals before year-end, we shouldn’t be prodigal like governments and find creative ways to waste the budget remaining. When we achieve the target (or goals), we don’t spend funds we over-estimated. We don’t know the future, so it is reasonable we did not budget correctly. “Return funds” to the “central pool” for optimization in the organization. Conversely, when we under-estimate, we need to re-examine our goals, and as needed, request extra funds or change the goals to stay within the budget.
One reason governments waste our tax dollars is they focus on money alone—the size of budgets—instead of goals and programs, and the best ways to do them. Another reason is they get away with this practice because we expect them to be profligate and inept.
When doing the budget, we must select the best path to the goal as we identify potential gaps and opportunities that might arise during the budget period. This approach is obvious, but many folks don’t do it. Either they don’t prepare a budget, or they budget after they start their journeys. Alternatively, they focus on money independent of their goals. Thoughtful budgeting before the event allows us to examine alternatives to show likely paths to handle potential gaps and opportunities.
Budgeting is putting the budget together—choosing the plan and methodically estimating and recording its cost to reach a specific goal or goals. It’s writing the roadmap and money map, the planning and evaluating of PEACE Budgetary Control, the counting the cost before acting stage.
Budgeting is an Iterative Process
Budgeting is iterative. We need to go through a few cycles to prune projects, and cut tasks to lower expenses to available income. This procedure is standard and the only way to be debt free with a fixed income. Don’t cut costs (especially across-the-board). Cut programs and tasks and their associated costs will disappear. When we cut costs, we do not focus on goals (programs and functions) and so, we will under-fund some, and over-fund others. Besides, irrational cost reduction encourages games where people submit high budgets knowing management will lower them. As a former Chief Financial Officer, I saw those games which do not benefit the overall organization.
It should be obvious why we should budget. Still, I will repeat it. We do a budget before a planned event to see whether we will have enough funds to reach our goals. Don’t merely look at what’s spent in the past and augment that figure to get a budget. Instead, decide the goals in the budget period first. Only after completing goals’ development do we cost them?
Suppose you planned to go to Vancouver (your goal) and estimated the cost at $500 (budget), but you had only $300. You would start your trip if you believed you could lower the estimate to $300. So you would consider different alternatives such as:
- Taking the train
- Shortening the stay
- Inviting a friend to share expenses
- Other choices
A realistic budget will lower your stress and will show the likely paths to your goal. You don’t know the future, which likely will change from your budget. Thus, probably you won’t achieve the budget unless you adopt a flexible budgeting approach.
Suppose you started the Vancouver trip without a budget, and you spent all your funds before the end. After you begin your journey, you lose some available expense-lowering choices. During the trip, inadequate funds would force you to choose from current alternatives. When you budget before you start your journey, you have more alternative solutions from which to choose.
Not budgeting and then spending all your money midway would challenge you. Your stress would rise, and you and your spouse would argue. Besides, you would need to change the goal or plan:
- Return home and not go to Vancouver.
- Go to Vancouver but stay fewer days, or stay at cheaper places, and or lower budgets for items such as food, sightseeing, and so on.
- You might finish the journey with borrowed funds.
Often individuals and companies say they prepare budgets but get no benefits. I am not surprised. A budget starts PEACE Budgetary Control (PEACE); it’s not the end, but a part of that procedure. When you budget, you get benefits only if you follow both elements of PEACE, budgeting, and controlling.
© 2018 Michel A. Bell