Activity Based Budgeting

Facts about Activity Based Budgeting


Making sound business decisions generally has some type of financial basis; often, the basis has been founded by using activity based budgeting.  This type of financial planning looks at budgeting in an innovate manner that helps a company to utilize their assets in the most optimal way.


Budgets are a way of managing money so that all expenditures will have funds to cover them.  It is also an excellent means for tracking how money is utilized.  Individual consumers often budget their household incomes, planning how their money will be used to pay bills, purchase personal expenditures and food; careful planning can garner savings at the end of each month that can be squirreled away for future spending.  Businesses operate on a much larger scale.  Rather than budgeting for a week or month at a time, companies must determine how much it will cost to operate their business over the course of a year.  The larger the company, the more complex the budgeting becomes.  Numerous departments, each responsible for their own functions, also have independent needs financially.  Manpower, raw materials, office supplies and incidentals are simply a few of the budgetary items that must be planned in order for the departments to continue their operations and maintain production levels.


There are two basic methods for budgeting at a business level, traditional budgets and budgets based on activities within the business.


Traditional budgets


The traditional means of budgeting within an organization used to involve examining the costs of running a department for the previous year and then allocating funds for its operation over the coming year based on those costs.  For example, a municipality has multiple departments it is responsible for funding; the police department, fire department, water department, public works department and office personnel to name just a few.  Each individual department head is in charge of anticipating their expenditures and for projecting the anticipated funds to cover them; generally accomplished by using the previous year’s budget allocation and simply adding a specific percentage to arrive at the new year’s figure.  When all department projections are combined, the result is the full budgetary requirements to run the municipality for the next year.  Expected income is also projected and, if necessary, projects and individual budgets may need to be trimmed so that income covers expenditures.


Activity based budgeting


A newer approach for budgeting is when the previous year’s activities within a company are analyzed to evaluate the performances in order to determine how to trim and plan the next year’s budget.  Fixed and variable costs are examined and comparisons are made to determine if the best decisions are being made between value and effectiveness.  Controlling how certain activities can increase profitability and which are actually draining funds from the company will help the company to stay on top of their game.  Salaries and bonuses are part of this determination, as their effectiveness in increasing the company’s bottom line is discovered.

 


Unlike the cost based planning that is provided through traditional budgets, those which focus on activities are able to be matched to strategic goals of the company by zoning in on profitable activities and eliminating or revising those which are not meeting the anticipated profitability.  It may be easier understood to learn that activity based budgeting starts by looking at the end result and how the activities contributed to it, while cost based budgets start at the beginning and works forward.


A company’s profitability is its mainstay.  Without goals to work toward and an appropriate plan to reach them, a business will surely fail.  Budgeting allows those at management levels to more effectively run each department within the confines of the financial plan while getting the most bang for their buck in every financially based activity.