Elements of the Budgeting Cycle

Whether the budget is for a household, a multinational corporation or for the federal government, the basic goal is the same -- to allocate funds to meet obligations. Other budget functions include planning for contingencies or emergencies, handling financial shortfalls or or, in fortunate circumstances, determining how to deal with a surplus. The budget cycle also has basic elements common to nearly all budgets, large and small.

The budget cycle describes the activities and processes behind developing budget for a single fiscal period. The length of the fiscal period varies depending on the organization and the stated goals of a particular budget. The function of a budget cycle is to define the steps from the beginning to the end of the process. However, a budget is actually a continuous process, hence the term budget cycle. The stages in the budget cycle often overlap, and actions taken at one stage of the budget cycle often have an impact on later stages.

A basic step in the beginning of the budget cycle is determining the expenditures that the budget will cover. The budget may cover specific expenditures and financial obligations, in which case this step in the budget cycle is often fixed rather than flexible. On the other hand, a budget cycle may address goals or projects in the planning stage, which allows for more flexibility in determining elements such as scheduling payments and even the amounts to be allocated for the expenditure items themselves.

Also important in determining the budget cycle is generating or locating revenue and assigning revenue to cover various items in the budget. At this stage, families or organizations often find that there is a gap between what they need or want to spend and the resources available. This circumstance often results in returning to the beginning stages of the budget and making cuts, either in the amounts of payments to various items or cutting out items altogether. Other options include seeking additional revenue to cover items that cannot or should not withstand cuts.

The final stage in the budget cycle is the actual execution of the budget. Circumstances may arise that necessitate changes even at this stage of the budget cycle. In addition to actually spending the funds allocated to specific items in the budget, it is necessary to create and maintain a spending record. This spending record provides internal and external accountability and provides a foundation for planning future budget cycles. Examining the budget record assists in the identification of trouble spots or opportunities for additional savings or even generating additional revenues.