5.09 – Knowing Your Internal vs External Budgets
The information prepared for external users, such as financing sources, tax authorities, and creditors, differs from what is used internally within a company. This distinction applies to both historical and forecasted financial information. Here are some examples of how businesses utilize the same information for different objectives:
The Internal Sales-Driven Budget
Sales and marketing teams often produce more optimistic budgets compared to those generated by operations or accounting. This optimism stems from their focus on potential opportunities, whereas accountants tend to be more conservative. Rather than having these groups debate over the accuracy of their forecasts, it’s beneficial to prepare two sets of projections.
Sales and Marketing Projections
Use these optimistic forecasts as motivational tools for your sales and marketing teams. They provide a higher target to strive for, driving performance and enthusiasm.
Conservative Projections
Use these more cautious projections for external financing sources. They offer a reasonable outlook that reduces the pressure on the company to meet overly aggressive targets. However, ensure that the difference between these forecasts is managed carefully to maintain consistency and credibility.
Drilling Down into the Details
When presenting information to external parties, the level of detail is significantly less than what is used internally. This applies to the budgeting process as well. Internally, budgets need to drill down to the core elements of the business, while externally, a summarized view is preferred.
For example, a summary budget might display corporate overhead expenses as a single line item. This line item could encompass hundreds of detailed entries, including costs from personnel in the accounting department to the advertising budget. External parties typically do not require or want this level of detail, as it can be confusing and prompt unnecessary questions. However, having the ability to drill down into these details internally is crucial for effective expense and cost control.
Benefits of Detailed Internal Budgets:
- Accountability: Detailed budgets hold team members responsible for managing expenses and costs.
- Support and Confidence: Providing detailed support for financial information presented in the budget enhances credibility with external partners, such as financing sources, by demonstrating tight management of the business.
By distinguishing between internal and external budgets, businesses can effectively manage expectations and provide the necessary information tailored to different audiences. This approach ensures that internal teams are motivated and accountable, while external stakeholders are reassured by credible and well-managed financial forecasts.
