Before we even think of answering the question and making our topic for discussion today it is very important that we start by defining the term budget. Most people use this term but do not really have a clear understanding of what it means. A budget is an estimate of the income and expenditure of an entity. This is over a given period of time and prepared through four stages of the Budget Process. Luckily this article covers the Key Four Stages Of The Budget Process. These are budget preparation, budget authorization, budget execution, and accountability which the USA, Canada, and the UK have adopted as budget-making process guides, since the 1960s as part of the 4 steps of the budgeting process.
This gives a guideline of how the entity’s resources will be distributed in order to achieve organizational goals without going off-budget. In short a budget serves as a guide to how much you need to spend for what reason. Usually, budgets are designed according to the available resources.
We hear a lot about government budgets. However, very few know the process by which this budget matures to a stage where it can be dished out to the public. The process we speak of is four stages of the Budget process which not only works for governments but also applies to small businesses that use budgets as the basis of their operations.
No stage is to be overlooked and a systematic way of carrying them out one by one needs to be formulated taking into consideration your business’ expenses and whether or not they have a positive effect on your profitability.
The Four Stages Of The Budget Process
The 4 steps of the budgeting process include budget preparation, budget authorization, budget execution, and accountability. Let us take a look at the four stages of the budget process/cycle in detail as explained below!
- Preparation and Submission
The structure begins with a thought and a budget is in itself a structure that needs to be created. From this standpoint, the thought process precedes the creation of a budget. You need to consider factors like how much income is needed and, if the available resources permit, what new initiatives can be included.
Let’s take for instance a small business owner whose creations and growth/development plans for the company determine what sails through the budget during these four stages of the budget process.
In the case of bigger corporations or even governments, budgets are prepared by finance units in their jurisdiction. Then, they are submitted to the powers that be. This process leads us to the next stage of the budget process as everything is now in their hands.
The atmosphere at this stage in the political sphere is quite different from that of the corporate world. In the latter, the company owner can simply stamp his signature in approval or not out of his discretion and maybe after a few consultations. Whereas in political circles, yes or no is not enough. Instead debates around the budget are held before approval.
Because of political differences among the leaders, the political process can negatively impact issues of priority. If businesses with larger boards fall victim to this bug, bankruptcy is imminent on the 4 steps of the budgeting process.
A piece of advice to small business owners, like myself, who handle all four stages of the budget cycle themselves; it is important that your accountant (if you have one) or trusted colleague goes through your budget before you stamp it.
Of course, when approved, a budget has to be implemented. That is what is meant by the term ‘execution.’ Governments tend to focus more on reducing spending and they put tight bottlenecks around funds. This doesn’t have to be the case in your business. You just have to devise a means of regulating expenditure and managing lower-than-expected revenue.
In my research, I came across this quote and I felt it is indeed profound to share Four stages of the budget process; “Most of the time money comes in and goes out in accordance with the budget. A good budget isn’t a limitation on what your company can spend. It’s a financial embodiment of your company’s strategy and tactics for the year.”
- Evaluation and Audit.
This is one of the most important stages of the budget cycle. Evaluation is an important aspect of all aspects of the business. It is not limited to budgets or finance. Some call this a progress check. No matter how good your budget is in concept, you have to frequently evaluate it and sometimes do revisions. Businesses have external stakeholders that can influence your business such that changes are inevitable. Customers and partner companies are some of these stakeholders.
Sometimes evaluation then reveals the flaws of some ideas you thought were so perfect. It also feeds into audits that trace how funds are used, dollar for dollar.
According to an observation, “The government audits and evaluates spending to ensure that money is being spent lawfully. But ongoing evaluation of your business’ budget requires a wider lens of these Four stages of the budget process. You’ll want to keep an eye on how effectively money is being spent. But what really matters in business is whether you’re operating at a profit after mastering what are the four stages of the budget process.”
Now we understand the four stages of the budget process which we now know as the budget cycle. My hope is we use this advice obtained as we journeyed through this article on the four stages of the Budget process. I prefer the word ‘cycle’ to ‘process’ more.
The former clearly shows you that this is not a once and for all process. In fact, the budget document is a living one from which amendments, additions, and subtractions draw hybrids of budgets. It would be very useful if you use diagrams and graphs clearly show the four stages of the Budget process. These are really useful as they show you exactly how your income, expenditure, and revenue are performing and what are the four stages of the budget process”. Learn and unlearn new things each time you do a budget for your business.
We also need to pay attention to the budget protocols by governments in order for us to understand our own businesses and the capacities they can hold under our respective governments. Economies certainly play a big role in learning the 4 steps of the budgeting process and private businesses and automatically government budgets have a contribution among the determinants of your own business’ budget by fully understanding What Are The Four Stages Of The Budget Process, above all What are the 4 phases of budgeting?
Small business owners need a plan around auditing. This is an important, yet highly specialized facet of accountability in business. It is wise to invest in a good Accountant or accounting consultant who can assist you with your budget processes.