Budget Manual

Budget Manual

Investopedia / Julie Bang

What is a Budget Manual?

A budget manual is a set of rules and instructions used by large organizations to prepare their budgets and related reports. As organizations become larger and more complex, it is no longer possible for just one person to prepare a budget.

Instead, budgeting across the enterprise must be carefully coordinated among various actors. Financial analysts work closely with each group to collect budget information on a pre-set schedule and then send data up through higher rings of financial controllers until it can be aggregated by the chief financial officer's (CFO's) office.

Key Takeaways

  • A budget manual is a set of standardized routines and instructions that large organizations follow in budgeting and reporting.
  • Large and complex organizations rely on such a manual to coordinate budgeting activities across several actors.
  • Budget manuals are developed and updated through a budget committee that oversees standards and practices within the organization's financial units.

The Basics of a Budget Manual

Budgeting within large organizations is an extremely complex task. Financial analysts must make assumptions about what the future will look like based on past data. This means that even the best budgeting process is subject to considerable inaccuracies. Then, as the year progresses, each group is held to a predefined budget, which may become inadequate due to changing conditions.

On the other hand, some groups will find that they have more money than they require, and may choose to surreptitiously use up the "extra" budget with unnecessary expenditures in order to avoid budget cuts.

The budget manual is usually developed and revised by a budget committee. A budget committee is a group that creates and oversees the standards for, practices to implement, and maintenance of an organization's fiscal responsibility.

Budget committees play key roles in the success or demise of a company or other corporate entity. The budget committee has a unique perspective in that they are privy to all of the financial comings and goings of an organization. They see the whole picture, whereas people in individual departments only see their segment of the company.

Committees try to keep their organizational budgets on track, which then ensures smooth operation and financial solvency. Organizations that cannot soon encounter financial problems. Financial problems often have a negative effect on the valuation of a company.

Example of a Budget Manual

For example, the quality assurance department of the hypothetical XYZ company is allowed a budget of $500,000 per year. This money can be spent on salaries, additional training, equipment and other things the quality assurance department needs. Cindy, a longtime veteran of the quality assurance department, has left the company. The quality assurance department can cover the workload and keep running just fine without her, but to ensure they do not lose part of their budget for maintaining their headcount, they need to hire another person and spend the remaining money that would have gone to Cindy's salary on training for the new person.