Budget process

Budget process refers to the systematic approach organizations use for preparing, reviewing, approving, and monitoring financial plans. This procedure transforms strategic objectives into quantified financial targets. The Chartered Institute of Management Accountants defines a budget as "a quantitative expression of a plan for a defined period of time."^[1] James O. McKinsey, widely recognized as the father of business budgeting, published his landmark book Budgetary Control on June 20, 1922, establishing the first comprehensive framework for corporate financial planning.^[2]

Historical development

The English word "budget" derives from the Latin term "bulga," meaning a leather bag used to carry supplies. Originally, budgeting was associated exclusively with governmental administration. The practice evolved significantly during the early twentieth century.

In 1921, the United States established the Bureau of the Budget (now the Office of Management and Budget) under presidential authority. Prior to this reform, the House Committee of Ways and Means had managed revenue and spending decisions since the Fourth Congress in 1795-1797.

Corporate budgeting emerged from industrial engineering and cost accounting practices that developed slowly between 1895 and 1920. Donaldson Brown pioneered business budgeting at DuPont starting in 1914, where he created what became known as the DuPont formula. He later implemented a flexible budgeting system at General Motors by 1923, working under CEO Alfred P. Sloan. McKinsey's 1922 textbook was included in Harvard Business School courses on Industrial Management and Control by 1922-23. By 1945, Budgetary Control appeared on lists of the twelve most indispensable management books.

Government budget process

The governmental budgeting framework operates through several distinct stages. Each phase follows procedures outlined in budget acts, legislative rules, and relevant statutes.

The process typically includes:

• Executive proposal: The President or chief executive submits a comprehensive budget request outlining policy and funding priorities
• Legislative review: The House and Senate pass budget resolutions setting total spending levels
• Appropriations: Detailed appropriations bills are prepared for separate areas of government
• Execution: Funds are allocated and spent according to approved budgets
• Audit: Independent review of budgetary activities occurs

The mechanics differ considerably among countries. Some nations emphasize strong executive control while others grant legislatures more authority over budget formulation.

Corporate budgeting methodology

Corporate budgeting serves as the tactical implementation of a business plan. A robust budget framework consists of several integrated components working together.

Types of budgets

Organizations typically prepare three main categories:

• Operating budgets: Detail revenues and day-to-day expenses including salaries, benefits, and operational costs
• Capital expenditure budgets: Allocate funds for long-term investments and control decision-making risks
• Cash budgets: Track payment timing and cash flow management

These combined budgets generate projected income statements, balance sheets, and cash flow statements.

Typical timeline

Most large companies begin the budgeting process four to six months before the fiscal year starts. Some organizations take an entire year to complete the cycle. Monthly variance analysis comparing actual results to budgeted figures is standard practice.

Key benefits

The process forces managers to consider changing conditions and develop contingency plans. Problems can be addressed more systematically when benchmarks exist. Resources are allocated based on strategic priorities rather than historical patterns alone.

Modern approaches

Contemporary budgeting has moved beyond traditional annual cycles. Rolling forecasts update projections quarterly or monthly. Zero-based budgeting requires justification for all expenses each period rather than using prior budgets as baselines. Activity-based budgeting links costs to specific business activities and outputs.

McKinsey himself argued that "mere study of past records is inadequate" and emphasized that "the past is gone and cannot be changed. It is only future operations over which control can be exercised."^[3]

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References

• McKinsey, J.O. (1922). Budgetary Control. Ronald Press Company.
• Chartered Institute of Management Accountants (2005). Official Terminology. CIMA Publishing.
• Horngren, C.T., Datar, S.M., & Rajan, M.V. (2015). Cost Accounting: A Managerial Emphasis. Pearson.

Footnotes

1. Chartered Institute of Management Accountants official definition of budget.
2. McKinsey, J.O. (1922). Budgetary Control. Ronald Press Company. Published June 20, 1922.
3. McKinsey, J.O. (1922). Budgetary Control. Chapter on managerial perspective.