No Nonsense Budgeting: 2- Associate budgets with business processes

This is the third in a series of blogs that will help your organisation to improve its budgeting process. In the last blog I covered the first area of improvement and that was to define the purpose of the budget. In this blog I will look at the second area that needs attention – associating budgets with business processes. Budgets are typically made up of financial measures that are either targets to be achieved (as in the case of income), or resources that can be consumed (e.g. expenses) that departments can spend in achieving those targets. Given that only the resources to be consumed can be directly controlled, then the allocation of budgets need to be associated with the volume and quality of work that those expenses enable. Businesses generate value through the arrangement of business processes (sales, production, customer service, etc.), as shown in the following graphic:
These processes can be split into:
  • ‘Core processes’ that typically consist of linked activities that directly relate to generating revenue; delivering products/services; supporting customers; and developing new products/services.
  • ‘Support processes’ such as those conducted by HR, IT, Finance, etc., who purpose is to ensure the smooth running of the organisation’s core processes.
From our last blog, the role of a budget is to enable the different activities to function within an uncontrollable and unknowable external environment. That budget will allow activities to be performed that lead to outputs (e.g. products, services), which hopefully will be sufficient to achieve the organisation’s purpose. It is therefore vital to connect budgets with work performed and outputs produced.
Below is a graphic that shows an example of a relationship between resources, workload and outputs generated.
It is only by considering outcomes and how they support business goals, can budgets be truly assessed for worth.  We will look in a future blog on how these relationships can be used to create budget content. Interestingly, many organisations pay staff based on their performance against budget. For this to drive the right behaviour, then the figures being used must combine work activity, with resource consumption and outcomes generated.
  • Define measures for each department that record work performed and the quality of that work.
  • Where possible, split out departmental expenses to the different types of work performed and any outputs that each work type generates..
  • Report budget expenditure for each department along with work performed and output generated.
  • Don’t reward people based solely on their ability to keep expenditure within budget. This leads to sandbagging and actions that could well jeopardise future organisational value.
In the next blog I will look at splitting budgets into fixed and variable items.  If you would like to see all the blogs in this series as a single document then request our free booklet ‘No-Nonsense Guide to Corporate Budgeting’. This straight-forward guide is based on many years of experience in implementing effective budgeting solutions for hundreds of organisations. It is aimed at those organisations frustrated with their current process and who want to transform it into a valuable management activity. It is guaranteed to help you get control and make best use of scarce company resources.