Describe budgeting capabilities
Plan basic budgeting
When using basic budgeting in Finance, you need to compile information about how the budgets should be configured before you begin the configuration.
Before you begin configuring basic budgeting or budget control, you should compile the following information:
Gather information about which financial dimensions and main accounts are used for budgeting and that can have amounts transferred either to or from them. (Main accounts are optional but used by most.)
Define currency exchange rates and what those exchange rates are.
Set up budget codes for each budget type, and determine which code is the default budget code.
Decide which budget register entries use workflows. You can assign workflows to budget codes. The budget register entries that are associated with a budget code that has an assigned workflow are automatically submitted to workflow.
Provide the names of each budget model.
Choose how the budget cycles will be set up.
Determine the amounts that will be allocated across periods or to other financial dimension values.
Select financial dimensions that have recurring amounts.
Decide which budget models will be used in cash flow forecasts.
Plan budget control
If you use budget control, compile the following information in addition to the information in the Plan basic budgeting topic:
Financial dimensions that should be included in budget control rules.
User groups that can post entries that exceed the remaining balance for a budget.
Source documents and accounting journals that should be enabled for budget checking.
Financial dimensions and accounts that must have a budget threshold and what that threshold is. A budget threshold is the level of budget usage at which you can prevent posting or display warnings. For example, if the threshold is 80, you can warn a user during ledger transaction entry that 80 percent of the budget for the selected account has been used.
The formula for calculating the remaining balance of a budget. The budget fund’s available calculation can be defined for each legal entity instead of always using the following calculation: Original budget - Actual expenses.
The interval, such as monthly, quarterly, or yearly, used to determine whether the available budget balance is enough to cover transactions.
Budgeting tools
Other planning and budgeting capabilities are available in Finance. The following budgets are integrated with ledger budgets.
Workforce budgets – Workforce budgeting includes detailed budget cost component planning for positions, compensation groups, and so on.
Fixed assets budgets – Based on fixed asset information, you can calculate planned depreciation and record other planned transactions related to fixed assets.
Project budgets – In the Projects module, you can create detailed project forecasts. The projects forecasts include details about the planned hours, expenses, fees, and items.
Inventory budget – In the inventory budget, you estimate the money or capital needed to purchase inventory. The inventory budget includes the sales forecasts, bottom-up budgeting, vendor analysis, and internal inventory controls.
Demand forecasting – Based on historical transaction data, you can estimate future inventory demand and create demand forecasts.
Budgeting methodologies
Several methodologies are available for defining budgets in your organization. Two of these are:
Zero-based budgeting
Historical budgeting
Zero-based budgeting
Zero-based budgeting is a method of planning and decision-making that reverses the working process of traditional budgeting. In traditional incremental budgeting, departmental managers justify only increases over the previous year's budget and what has already been spent is automatically allowed. Zero-based budgeting can be used to build the whole budget from scratch without pulling from last year’s budget or from last year’s actuals.
Advantages of using zero-based budgeting include:
Allocating resources efficiently because it's based on needs and benefits.
Driving managers to find cost-effective ways to improve operations.
Helping to detect inflated budgets.
Historical budgeting
Historical budgeting, sometimes referred to as incremental budgeting, uses a budget prepared by using a previous period's budget or actual performance as a base, with incremental amounts added for the new budget period.
Advantages of historical budgeting include:
The budget is stable, and change is gradual.
Managers can operate their departments on a consistent basis.
The system is relatively simple to operate and easy to understand.
Basic budgeting overview
You can use basic budgeting to define the financial dimensions for budgets, create budget models, and set up and use budget register entries. You can also set up optional budgeting workflows to automate review of budget register entries, including budget transfers.
For example, if an approval is required for transferring a budget amount from one department to another, then workflow functionality helps to create an approval workflow. This unit explains the basic budgeting and control processes.
Multiple methods exist for creating budget register entries in Finance:
Manually enter the document information on the Budget register entries page.
Use a Microsoft Excel template that you can open by selecting the Open in Excel button on the Budget register entries page.
Use the Budget Account Entries data entity in Data management to import budget register entries. You should consider using this method and turning on the Set based processing parameter when you need to import many budget account entries into the system.
Use the Generate budget register entry periodic process if the company uses Budget planning functionality to prepare budget data.
Budget control overview
Budget control in Finance helps you manage financial resources. Budget control is a method of ensuring that enough budget funds are available for planned or actual purchases. After setting up basic budgeting, you can set up budget control.
Budget control in Finance supports management of an organization's financial resources through the chart of accounts, workflows, user groups, source documents and journals, configurable calculation of available funds, budget cycles, and thresholds. When controls are in place, an organization can plan, measure, manage, and forecast its financial resources throughout its fiscal year.
You can configure budget control according to several factors:
Financial dimensions - Discover which financial dimensions must be used to report budget and actuals, and which financial dimensions are required to control budget. Determine whether specific dimension combinations or main accounts require attention. For example, you might need to verify whether requirements exist to track budget to actuals by cost center and program, or if travel expenses require special attention.
Time - Determine which time frame (fiscal period, fiscal period to date, and so on) will be used to evaluate available budget funds.
Source documents - Establish which source documents must be evaluated for budget control and whether the documents should be evaluated per line or per document.
Funds available calculation - Determine if documents such as purchase requisitions (pre-encumbrances) and purchase orders (encumbrances) should be considered in the calculation of available funds. Evaluate whether documents that are in a draft state should be considered in the calculation.
Override permission - Discover who has permission to exceed the available budget.
Budget control is fully integrated with Finance. Therefore, you can evaluate the available budget for planned purchases and actual purchases. Budget inquiries and reports are available; therefore, users can evaluate the budget throughout the budget cycle and can make any adjustments that are required in the form of budget revisions or transfers. A budget manager can also export the budget and actuals into Microsoft Excel to better analyze and forecast as required.
Let’s consider the following scenario: A purchasing agent creates a purchase order that has multiple lines. The first three lines are entered. When the purchasing agent enters the fourth line, a message is displayed that the financial dimension value is over budget.
The purchasing agent isn't in a user group that is authorized to exceed the budget. The purchasing agent can complete the fourth line, enter more lines, and save the purchase order in a Draft state.
The purchasing agent then notifies a manager of the over-budget situation. The budget manager has the authority to exceed the budget funds available. The budget manager can open the purchase order and continue with the purchase order confirmation without changing any amounts or accounts.
Later, the budget manager performs a budget transfer to increase the available budget for the financial dimension value that was over budget.