Creating a Budget from Answers to Three Basic Questions

Creating a Budget from Answers to Three Basic Questions

By Karl Kern, Accountant / Lecturer / Writer

Karl Kern has a BBA degree in Accounting from Temple University, and an MBA degree with a concentration in Finance from Babson College. After graduating from Temple University Karl started a career where he has established a reputation as a problem solver. Karl’s reputation as a problem solver is based on his ability to create as well as implement initiatives that have helped organizations increase revenues, decrease expenses, and improve cash flows.

Karl’s ability to create as well as implement initiatives is due to being a well-read individual with exceptional organizational skills and passion. It is Karl’s passion that guides him to improve the lives of not only himself but also those around him.

LinkedIn account: https://www.linkedin.com/in/karlhkern/

Financial Planning is a process of thinking. One of the end results from this process is a product called a budget.  A budget is a product that expresses thoughts.  As a product a budget must be created and its creation must have a foundation.  The foundation for creating a budget is answers to three basic questions.

What should be done?

The first basic question that requires an answer is: what should be done?  The answer to this question is create, promote, and support what is sold.  These tasks appear in a budget through an income statement. An income statement is recognized as a financial statement that communicates the profitability of an entity but recognizing an income statement solely on the communication of profitability limits the power of this financial statement.  

The power of an income statement is its ability to describe what an entity is doing in order to achieve profitability.  For merchandising entities like Walmart and manufacturing entities like Apple the task of creating what is sold appears on an income statement as cost of goods sold.   For merchandising entities, manufacturing entities, and service entities like Google the task of promoting what is sold appears on an income statement as selling expenses.  For all three types of entities - merchandising, manufacturing, and service – the task of supporting what is sold appears on an income statement as administrative expenses.

Each one of these tasks – create, promote, and support - answers what should be done which are expressed through expenses on an income statement in order to organize effort. Effort represents an attempt to turn ideas into reality; reality is what stakeholders see in the value of entities. Value seen from the eyes of stakeholders is a result achieved from creating, promoting, and supporting what is sold by entities. 

Why should it be done?

The second basic question that requires an answer is: why should it be done?  The answer to this question is to accumulate wealth.  Accumulating wealth can create negative feelings because this task can be interpreted as a greedy motive, however, this task is critical for entities to be viable.  

Viability is defined as the ability to achieve success and regardless of the type of entity – merchandiser, manufacturer, or service provider – success is tied to the ability of an entity’s ability to accumulate wealth.  The viability of entities like Amazon, Apple, and Google has been established by their accumulation of wealth through their effort.  

The effort of Amazon has changed the way people buy products, the effort of Apple has changed the way people interact, and the effort of Google has changed the way people obtain information. The changes that these entities have created are not one-sided because they took the recognition of value from stakeholders that allowed Amazon, Apple, and Google to accumulate wealth.   It is the recognition of value from stakeholders organized by the answer of what should be done that establishes the viability of entities through the accumulation of wealth.

How should it be done?

The third basic question is: how should it be done?  The answer to this question is not as clear-cut as the answers to the first two questions because of circumstances.  Some circumstances may be more suitable for some entities to create what they sell through the purchase of products while some circumstances may be more suitable for other entities to create what they sell through the conversion of raw materials.  

Some circumstances may be more suitable for some entities to promote what they sell through networking events while some circumstances may be more suitable for other entities to promote what they sell through social media services.  Some circumstances may be more suitable for some entities to support what they sell through employees while some circumstances may be more suitable for other entities to support what they sell through consultants.  

What has been described above serve as examples of how entities should do things but many more examples exist.  Since what was described above as well as many more examples not described above entities must look to expertise that stimulates thinking about how things should be done that can be incorporated into a course of action that establishes the viability of entities through profitability which is organized by the creation of an income statement.

 It is this circumstance, answering the question of how things should be done that leads to a course of action that establishes viability through profitability, which highlights the importance of FP&A professionals.  FP&A professionals have the characteristics and knowledge to help entities determine how things should be done.

Budget tangibility

What makes a budget a product is its tangibility; tangibility is defined as the capability of being recognized instead of imagined.  A budget possesses tangibility because it can be recognized as visible reference material for decision makers within entities.  A budget should represent reference material so people can see how to

  1. Create, promote, and support what they sell
  2. In order to accumulate wealth
  3. Under a variety of circumstances.