What Is the Budget Cycle?

by Gail Sessoms

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The budget cycle refers to the life of a budget from creation to evaluation. Although
small businesses might not use the term budget cycle, they use the process when
they painstakingly work through the steps required to build and implement a budget.
The budgeting process progresses in stages as plans are made, funds are allocated
and new information leads to revisions. The four segments of the budget cycle
preparation and submission, approval, execution and audit and evaluation provide
the framework for creating one of the most important tools a business needs to
succeed.
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Budget Cycles
The budget cycle is common to government agencies that are required to use
transparent budgeting processes, but the concept is easily adapted to the needs of
businesses. The budget cycle promotes due diligence and accountability since
research, past performance and financial projections feed the process and decisions
are documented at each stage. The clearly defined segments of the budget cycle
encourage a careful process that allows for input and revision as you work to build the
budget that works best for your business. The budget cycle usually begins in advance of
the companys accounting period and ends well after that period ends.

Preparation and Submission

During the preparation and submission segment of the budget cycle, the business
considers the numbers and makes decisions. Your business might have several
departments that submit projections for their budgetary needs or your budget might be a
simple document that requires little input from others. The completed budget is
submitted to the individuals who need to review, make recommendations and approve
the budget. This give-and-take might occur between you and an accountant. The budget
might move back and forth between preparation and submission until all parties accept
the document.

Approval and Execution

The formality of the approval segment depends on the size of your business, but
approval of the budget makes it official. Elected officials and high-level managers
approve government budgets. A sole proprietorship only needs the owners approval.
Budget approval for a larger business is the responsibility of boards, committees or
authorized executives. While an individual owner might make changes at will, a
business with more employees likely will require adherence to the budget unless
changes are authorized. The execution segment begins at the start of the companys
accounting period, such as the fiscal or calendar year. Monitoring and control of
financial activity occurs during execution. Adjustments are made as needed as the
budget is implemented.

Audit and Evaluation

The audit and evaluation segments occur after the accounting period ends. An internal
or external audit examines the financial activities during the accounting period,
assesses compliance with the budget and measures the accuracy of projections used to
create the budget. The evaluation provides a final report on the budget and the audit
and makes recommendations for the next budget cycle and budget.
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What Is the Budget Cycle?

by Sam Ashe-Edmunds

Budget cycles improve financial

reporting to help management
monitor company performance.
Related Articles
1 4 Phases of a Budget Cycle
2 Five Types of Budgets in
Managerial Accounting
3 Why Is it Important for a
Business to Budget?
4 What Is an Income Projection
Statement?

A businesss budget cycle is the

time frame a budget covers, with
companies using monthly,
quarterly and/or annual budget
cycles to control costs and
streamline administrative duties.
Understanding the purpose of a
budget cycle and the types used
will help you decide how to
implement one or more for your
overall business or across your
departments.

Purposes

Purposes of budget cycles include

helping control costs, making it
easier for a finance department to
prepare reports and allowing
management to respond to
performance problems or
opportunities that regular
variance analyses disclose. For
example, if the production
department has a limit on how
much it can spend on labor during
a quarter, it can better plan its
workflow. Based on the
production departments results
at the end of the quarter,
management can decide if it
needs to raise or lower the
departments budget for labor. At
the end of each cycle, accounting
will perform a budget variance
analysis to compare how budget
performance compared to
projections, giving management
more detailed financial
information to make decisions,
such as how to manage cash flow
during different quarters of a
seasonal business.

Budget Cycles vs. Periods

A budget cycle includes the time

during which budgets are
planned, discussed, approved and
analyzed. A budget period is the
actual dates to which the budget
applies. Therefore, a quarterly
budget cycle that covers a three-
month budget period will start
before those three months and
end afterward.
Monthly Budget Cycle

For monthly budget cycles, the

budget period begins on the first
day of the month and ends on the
last day. Because of the different
number of days during different
months, daily averages or
monthly totals will vary from
month to month. For example, if
the marketing department has
$10,000 to spend on pay-per-click
advertising each month, its daily
average allowance will vary each
month. If the department is given
a daily expense amount, total
spending will vary each month.
Because of the amount of work
involved with managing 12
budget cycles, these are often
used at the departmental level
and often only include a few
income and expense items, rather
than the overall department of
the budget.

Quarterly Budget Cycles

A quarterly budget cycle covers

any consecutive three-month
period. Common quarterly budget
periods cover January through
March, April through June, July
through September and October
through December. Quarterly
budget cycles are more common
than monthly cycles because of
the amount of work preparing,
monitoring, analyzing and
reporting for that cycle. Quarterly
budgets are particularly helpful
for seasonal businesses.

Annual Budget Cycles

Annual budget cycles provide

fiscal-year data to show a
companys profitability based on
projections at the beginning of
the cycle and actual performance
at the end of the cycle. Most
business use an annual budget
cycle to monitor the overall
performance of the business.
Annual budget periods usually
run either from January 1 to
December 31, or from July 1 to
June 30.

Other Factors

Public companies rely on

quarterly and annual budget
cycles to help meet their
government disclosure and
reporting requirements.
Governments use budget cycles
because legislative bodies must
often approve budgets.

What Is the Budget Cycle?

by Sam Ashe-Edmunds

Budget cycles improve financial reporting to help management monitor company performance.

Related Articles

1 4 Phases of a Budget Cycle

2 Five Types of Budgets in Managerial Accounting

3 Why Is it Important for a Business to Budget?

4 What Is an Income Projection Statement?

A businesss budget cycle is the time frame a budget covers, with companies using monthly, quarterly
and/or annual budget cycles to control costs and streamline administrative duties. Understanding the
purpose of a budget cycle and the types used will help you decide how to implement one or more for
your overall business or across your departments.

Purposes

Purposes of budget cycles include helping control costs, making it easier for a finance department to
prepare reports and allowing management to respond to performance problems or opportunities that
regular variance analyses disclose. For example, if the production department has a limit on how much it
can spend on labor during a quarter, it can better plan its workflow. Based on the production
departments results at the end of the quarter, management can decide if it needs to raise or lower the
departments budget for labor. At the end of each cycle, accounting will perform a budget variance
analysis to compare how budget performance compared to projections, giving management more
detailed financial information to make decisions, such as how to manage cash flow during different
quarters of a seasonal business.

Budget Cycles vs. Periods

A budget cycle includes the time during which budgets are planned, discussed, approved and analyzed. A
budget period is the actual dates to which the budget applies. Therefore, a quarterly budget cycle that
covers a three-month budget period will start before those three months and end afterward.
Monthly Budget Cycle

For monthly budget cycles, the budget period begins on the first day of the month and ends on the last
day. Because of the different number of days during different months, daily averages or monthly totals
will vary from month to month. For example, if the marketing department has $10,000 to spend on pay-
per-click advertising each month, its daily average allowance will vary each month. If the department is
given a daily expense amount, total spending will vary each month. Because of the amount of work
involved with managing 12 budget cycles, these are often used at the departmental level and often only
include a few income and expense items, rather than the overall department of the budget.

Quarterly Budget Cycles

A quarterly budget cycle covers any consecutive three-month period. Common quarterly budget periods
cover January through March, April through June, July through September and October through
December. Quarterly budget cycles are more common than monthly cycles because of the amount of
work preparing, monitoring, analyzing and reporting for that cycle. Quarterly budgets are particularly
helpful for seasonal businesses.

Annual Budget Cycles

Annual budget cycles provide fiscal-year data to show a companys profitability based on projections at
the beginning of the cycle and actual performance at the end of the cycle. Most business use an annual
budget cycle to monitor the overall performance of the business. Annual budget periods usually run
either from January 1 to December 31, or from July 1 to June 30.

Other Factors
Public companies rely on quarterly and annual budget cycles to help meet their government disclosure
and reporting requirements. Governments use budget cycles because legislative bodies must often
approve budgets.