The Budgeting Process

Budgeting is an annual process that creates a year-long financial plan of estimated sales revenue, expenses (including payroll), and profitability for the following year. Budgeting is important to retailers for these reasons:

  • Publicly traded retailers communicate revenue and profitability targets to the financial community. The share price is determined in part by the company’s performance against the budget.
  • Managers at all levels are compensated in large part based on their performance against the budget.
  • Store managers make staffing and scheduling decisions based on how they perceive their performance against the budget in both the current time period, such as a week or a quarter, and for the entire fiscal year.

The budget is often the result of a solicitation process, where budget managers at multiple levels in the corporate hierarchy can edit and approve the budget data. Budgeting is a complicated and iterative process, because creating the budget involves extensive collaboration and consensus building. A budget must pass through multiple levels of checkpoints and controls before the budget is finalized.

The budget is typically created during Q4 for the next fiscal year. However, at that time there is insufficient financial data to accurately estimate sales and payroll for the entire year. Therefore, the budgeting process is often repeated in Q1, after the books are closed for the previous fiscal year. At that time, the budget is updated with more accurate estimates for the current fiscal year. Otherwise, the budget is not frequently updated.

The annual budgeting process usually starts during the third quarter (Q3) or fourth quarter (Q4) of each fiscal year (FY):

  1. The Corporate Finance and Merchandising departments generate a corporate budget for the upcoming year.
  2. The Financial Planning and Staffing departments specify desired payroll levels for the budget, which are usually based on fixed labor as a percentage of sales (L%S).
  3. The budget is passed further down the levels for approval.

Each level in the organization hierarchy can adjust the budget projections. However, each adjustment must be approved by the level above, which can then perform additional edits. Whenever the budget is edited, the application:

  • recalculates the budget data
  • verifies that the modified data meets the allowable user-defined thresholds, such as minimum hour and maximum annual payroll requirements
  • performs the necessary aggregation and/or distribution calculations

After the budget has gone through the entire hierarchy, the sales and payroll data is locked for FYQ1 for the upcoming year; after the data is locked, it becomes the annual budget.

Since the budgeting process occurs before the end of the fiscal year (that is, before the end of FYQ4), the financial estimates for FYQ4 cannot be accurate. Therefore, in FYQ1, after the books are closed for FYQ4 of the previous year, the annual budgeting process is often repeated and updated with more accurate data. Occasionally, budgets are edited because of exceptional situations, such as shifting store opening or closing dates or natural disasters.