Financials are one of the most important aspects of any business venture. It comprises a variety of aspects; budget allocation being one of the aspects. In this article, we will define budget allocation, identify its components, and explain why it is such an integral part of business of all sizes and all segments.
Proper management of financial systems and processes are vital for every business. It ensures that organizations know the resources that they have available, and how to allocate those resources for the betterment of their venture. In short, budget allocation allows for more effective planning and financial control.
Budget allocation helps businesses:
- Ensure that their resources are being used efficiently and effectively
- Make the best decisions possible
- Demonstrate accountability
- Take proper remedial action wherever it is needed and whenever it is necessary
Methods Used for Budget Allocation
Typically, budgets are reviewed annually and are established for a 12 or 24 month period of time. Budgets are usually established on the basis of the expenditures that were made during the previous year, with the addition or subtraction of any changes that have taken place in spending; the hiring of new staff members or the adjustment of salaries, for example. For instance, in a business, each department is granted a pre-determined amount of money to spend over the course of a year or two years. Typically, the head of each department is responsible for allocating the funding to the staff that works in that department. The goal of a budget is take into account all expenditures in each department.
These expenditures include:
- The salaries of the staff
- The expense that is associated with buying resources
- The miscellaneous expenses that may be associated with any unforeseen needs or circumstances
Components of Budget Allocation
Traditionally, a budget is divided into allocation components. These components are usually based on the core priorities of an organization. For instance, the allocation components in a university might include enrollment of students, as well as research. Institutions may also include some performance incentives in their budget, which helps to boost the morale of the staff, which can boost productivity and improve overall success.
The components of budget allocation are split into a matrix. Once the matrix is determined, a monetary value is allocated to the different components. This is then divided further into a value for any subcomponents that may exist.
Adjustments Associated with Budget Allocation
Budgets usually include a percentage rate of adjustment. This percentage normally ranges between 2 and 5 percent. This rate of adjustment allows an organization to allocate resources to any unforeseen expenses, as well as an under or over approximation of expenditures.
Budgets are reviewed and adjusted periodically over the course of the pre-determined budgetary period. This allows an organization to account for adjustments in income and expenditures.
As mentioned, budgets are periodically monitored over the course of time that they encompass. Regular monitoring of expenditures is vital. It not only verifies expenditures against their target, but it also identifies changing circumstances or patterns where corrective action needs to take place.
In order to monitor expenditures, the following information is needed:
- The budget for the area of activity for the full time period of the budget
- The actual date of the expenditure
- Expenditure commitments for the future
- The balance of remaining annual budget
- The outturn of the budget forecast
- The analysis and explanation of both positive and negative variances
Tips for Effective Budget Allocation
In order to ensure a business runs as smoothly as possible and enjoys maximum success, it is important for its budget to mirror its strategic goals. The following tips can ensure effective budget allocation that will help a business reach its goals:
- Gather as many insights as possible
- Develop a long-term vision
- Measure performance indicators
- Establish realistic goals
- Modify your strategy whenever it is necessary
Budget allocation is vital for any business and must be done properly to ensure success.