What is budgeting in business?
Budgeting is setting a financial plan for a future period, usually the next financial year, showing expected revenue, costs, headcount, capital spending and cash, broken down by month, department and account. Once approved, the budget sets spending limits and targets, and actual results are compared against it every month to explain and act on differences.
Also calledannual budgetannual operating planAOP
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- Usual period
- Next financial year, by month
- Approved by
- The board
- Tracked by
- Budget against actual
How budgeting works
The annual cycle usually starts three to four months before the year begins. Leadership sets targets; finance issues assumptions such as pay rises, price changes and exchange rates; department heads build their cost and headcount plans; and sales sets revenue targets. Finance consolidates the inputs into a budgeted profit and loss, balance sheet and cash flow, goes back and forth on changes, and the board approves the result. Approaches differ: incremental budgets adjust last year's figures, zero-based budgets justify every cost from nothing, and driver-based budgets build from operational drivers such as volumes and headcount. During the year, management accounts show budget against actual, and many companies add rolling forecasts so the plan stays current. Spreadsheets are still common, while planning software adds workflow, version control and links to the ledger and HR data.
Common questions
What is the difference between a budget and a forecast?+
A budget is the approved plan and target, set once a year. A forecast is the latest estimate of what will actually happen, updated during the year as results come in.
What is zero-based budgeting?+
Building each budget from zero, so every cost has to be justified, rather than starting from last year's spending and adjusting it.
Who prepares the budget?+
Finance runs the process and consolidates it, but department heads and sales leaders provide most inputs, because they own the costs, headcount and revenue targets.
Budgeting software
PigmentCollaborative business planning across finance and operations.Profile →
AnaplanConnected planning across finance, sales and supply chain.Profile →
AbacumAutomated reporting and planning connected to operational data.Profile →
AlephTwo-way sync between spreadsheets and source systems.Profile →
HeluAutomated management reporting for small businesses.Profile →Part of Accountio’s accounting technology coverage · Glossary
