GUEST BLOG: Will activity-based budgeting benefit your business?

By Linda Halabi, True Sky

Activity-based budgeting can provide an opportunity for businesses to streamline costs, improve business practices, and meet objectives rather than simply setting a budget based on prior years.

Activity-based budgeting has become an extremely popular accounting strategy in recent years.

While more traditional cost-based budgeting generally adjusts a prior year’s budget simply by accounting for inflation, activity-based budgeting looks at each activity within the business and its associated costs in detail. Those activities are then evaluated to ensure they are contributing to the business’ overall objectives.

By looking at each individual activity and the costs and revenues associated with it, opportunities for greater efficiency and improvement can be uncovered.

Areas of lack or excess will be highlighted and operational costs will need to be justified. This insight allows managers and CFOs to allocate resources more effectively.

MORE KNOWLEDGE OF BUSINESS OPERATIONS

Activity-based budgeting also requires managers to have more knowledge of, and be more in touch with, business operations and costs and can therefore result in better decision making overall. This visibility in turn encourages departments to prioritise and strive to operate more efficiently.

One thing to note is that for activity-based budgeting to work, employees need to record the time they spend working on different activities. Therefore, ensuring employees are committed to accurately recording their time and that management is committed to acting on the data are two essential pieces in the activity-based budgeting puzzle.

ACTIVITY-BASED COSTING SYSTEM

Another important aspect of activity-based budgeting is that you will need an activity-based costing system in place. The right budgeting software can help tremendously with this.

Since every activity and associated cost will need to be tracked, budgeting software can automate this tracking process and provide valuable data. This data will help your accounting department create more accurate financial projections and more precise budgets.

While many businesses can benefit from activity-based budgeting, it may not be the best strategy for some.

Linda Halabi, TrueSky

For example, a company that produces a number of different and diverse products might not be suited for this budgeting method because the cost of production, consumption, sales, and overhead may vary significantly from one product to another and will distort the results of the analysis.

By looking at each individual activity and the costs and revenues associated with it, opportunities for greater efficiency and improvement can be uncovered

Activity-based budgeting does work well for many businesses, however, especially businesses in which overhead costs are a significant portion of total operating costs; then activity-based budgeting can help you break down your costs by each activity and budget appropriately.

If done properly, activity-based budgeting will result in a more detailed understanding of an organisation’s costs, which is always valuable.

By understanding the link between a business’ processes and activities, and their related costs and benefits, a business can be more agile in decision-making and shifting funds to where they are needed. This information will lead to increased control over expenditures and a healthier budget and business overall.

While activity-based budgeting does require a bit more effort, it can certainly be worthwhile.

Having the right software in place can automate much of the process, reducing the amount of additional time you will have to put into this budgeting strategy while streamlining your financial processes.

Photo (main): Ken Teegardin