7 Questions to Ask When Creating a Departmental Budget

1. What needs to change from last year's budget?

Many businesses start the budgeting process by using the previous year's figures as a jumping-off point. This can be a useful time-saving measure, but it's important not to rely on assumptions that ongoing financial commitments, revenue projections and other key elements will stay the same every year.

Working alongside department heads and stakeholders, cast a critical eye over the preceding year's budget and ask which parts of it are still relevant for the next financial period, what needs to be revised and what can be removed altogether.

As well as making financial sense, this can help individual teams improve forecasting and sharpen their focus on goals and potential challenges for the coming year.

2. What are the department's priorities for the next year?

One of the benefits of departmental budgeting is that it enables you to concentrate on the objectives that particular teams want to achieve, and the resources they'll need to make progress towards these aims.

Team leaders and stakeholders should be given the opportunity to get involved in creating budgets. In fact, they're likely to be among the most important contributors to the entire endeavor, as they're the ones most familiar with current conditions, priorities and obstacles in their area of the business.

If the product research and development team will be focused on expanding the company's customer offerings in the next year, for example, finance needs to make sufficient budgetary provisions for them to do the job properly.

Talking through departmental priorities can also help with another key element of budgeting: projecting sales, earnings and profits from particular lines of business.

3. Has the company's financial supply chain changed?

When creating a departmental budget, it's crucial to consider whether there have been any changes in the company's financial supply chain. This includes changes in the company's revenue sources, costs of production, and methods of financing. Changes in these areas can significantly influence your department's budget.

For example, if the company has recently lost a major source of revenue, this could impact the amount of money available for departmental budgets. On the other hand, if the business has found ways to reduce production costs, this might free up resources that can be allocated to each department.

You should also consider changes in the economic environment that might impact the company's financial supply chain. For instance, changes in market conditions, regulatory changes, or shifts in consumer behavior can all affect the company's finances.

4. Does the department need to hire more staff?

People are among the most important investments the company will ever make, so it's crucial to ensure funds are available for teams to hire the people they need, when they need them.

If, for instance, there's a big project on the horizon for the marketing department that will require specific technical knowledge - such as a website redesign and relaunch - you need to make provisions in the budget for any recruitment that will be required to procure these capabilities.

There are ways to minimize spend in this area - hiring contractors and temporary workers to ensure you're accessing key skills at the right time and not acquiring permanent staff you won't always need, for example. However, it remains vital to ensure the right funds are available for recruitment, so departments aren't left short-handed or without key skills at critical times.

5. Where can we find opportunities to cut costs?

Optimizing costs and expenditure is a constant priority for the finance team, and becomes particularly important when the time comes to produce and revise your budgets. Working at a departmental level can open up more opportunities to increase your financial efficiency by focusing on issues such as relationships with suppliers and creditors.

If you're able to work more closely with local vendors, for example, you could reduce your overall freight and shipping costs.

Supporting departments in their efforts to build stronger and closer relationships with suppliers could also lead to new opportunities to negotiate discounts.

6. Is there flexibility in the budget?

If there's one thing the events of 2020 and the subsequent economic fallout taught businesses, it's that you should always expect the unexpected.

It's extremely difficult (if not impossible) to predict with a high level of certainty what could be around the corner for your industry and your organization. For this reason, it's good practice to make certain allowances in your budget for as-yet unknown risks that could impact your earnings, increase your costs, or both.

Departments need to bear this in mind when making their plans and setting goals for the coming year. Managers might be keen to launch new projects and take on employees to drive growth, but the budgetary provisions required for these activities should be evaluated in the context of broader market conditions and business challenges.

7. Is the budget in line with wider company goals?

Departmental budgets shouldn't exist in isolation. The budgeting process should always take place with the overarching goals and ambitions of the business in mind, so when you're approaching it from the perspective of individual departments, it's important to ensure these plans fit into the bigger picture.

When you're evaluating budgetary commitments, investments and spending plans for specific parts of the company, ask whether a clear line can be drawn between the decisions you make and the organization's wider objectives.

This will help to ensure that, as well as providing the financial structure and information the firm needs, departmental budgets will support broader efforts to achieve business growth and success.

Further reading:

• Understanding Accounts Payable: The CFO’s Complete Guide
• How to Plan and Forecast with Total Confidence
• How to Make ERP Work for Your Business
• Manage Your Cash Flow