Cyclical budget is one type of budget that is important in company financial management. This budget is made by considering the business cycle or economic fluctuations that occur in a certain period. In managing cyclical budgets, companies must understand the characteristics of the business cycle and how to anticipate fluctuations in income and costs that may occur.
The importance of cyclical budgeting in financial management cannot be ignored. In business, demand sometimes increases or decreases, so companies must be able to anticipate these changes by making budgets that are flexible and adaptive. In making cyclical budgets, companies must also manage the allocation of funds wisely and determine accurate performance measurement metrics.
In this article, we will discuss further the characteristics of cyclical budgets, the steps in making them, cyclical budget management, examples of implementation in companies, and important conclusions that can be drawn from cyclical budget management. Thus, it is hoped that the reader can understand how important the cyclical budget is in the company’s financial management.
Characteristics of Cyclical Budgets
Cyclical budgets have special characteristics that companies need to understand in order to make and manage budgets properly. Some of the characteristics of a cyclical budget include:
1. Consider the Business Cycle
Cyclical budgets are prepared by considering the business cycle, namely economic fluctuations that occur within a certain period. The business cycle generally consists of expansion, peak, contraction, and bottom phases. In each of these phases, the company must consider the effect on revenues and costs, and make any necessary budget adjustments.
2. Calculating the Volatility of Income and Expenses
Cyclical budgets must take into account the volatility of income and costs. Fluctuations in income and costs can occur due to changes in economic conditions, market competition, and other factors. In managing cyclical budgets, companies must be able to estimate fluctuations in income and costs and arrange appropriate fund allocations.
3. Consider Resource Utilization Rate
The cyclical budget must also be considered
balance the level of resource utilization. When demand increases, companies must be able to make the most of existing resources. However, when demand decreases, companies must be able to adjust the use of resources so as not to suffer losses.
4. Calculating Risk and Uncyclicality
Cyclical budgets must also take into account risk and cyclicality. Risks may occur due to market fluctuations, regulatory changes, or other factors. Uncyclicity occurs when a company experiences unexpected changes in conditions in the business cycle. In managing cyclical budgets, companies must be able to anticipate risks and cyclicalities and develop strategies to deal with them.
Steps in Creating a Cyclical Budget
Creating a cyclical budget is not easy, but it can be done by following a few important steps. These steps can help companies to make adaptive and flexible budgets and be able to deal with economic fluctuations that occur. Some important steps in creating a cyclical budget include:
1. Study the Business Cycle
Companies must understand the business cycle to be able to create a proper cyclical budget. In studying the business cycle, companies must pay attention to factors that affect economic fluctuations such as market conditions, competition, and regulation.
2. Identify Revenue and Expense Fluctuations
Companies must be able to identify fluctuations in income and costs that may occur in the business cycle. In identifying these fluctuations, companies can take into account factors such as the level of market demand, production costs, and competition.
3. Manage Fund Allocations Wisely
After identifying fluctuations in income and costs, the company must be able to manage the allocation of funds wisely. Allocation of funds must be adjusted to changes in the business cycle and consider the risks and cyclicalities that may occur.
4. Define Performance Measurement Metrics
Companies must determine accurate performance measurement metrics to monitor cyclical budget realization. Performance measurement metrics can include factors such as spending levels, return on investment, and financial ratios.
5. Periodically Review and Update the Budget
Cyclical budgets should be reviewed and updated regularly to keep up with changes in the business cycle. The company must be able to adjust the budget with fluctuations in income and costs that occur and take into account the risks and cyclicalities that may occur.
Cyclical Budget Management
Cyclical budget management is a budget management process that follows the business cycle and takes into account fluctuations in income and expenses that occur. In this case, companies must be able to make adaptive and flexible budgets and be able to deal with changes in the business cycle.
To carry out cyclical budget management, companies must follow several basic principles which include:
1. Understanding the Business Cycle
Companies must understand the business cycle and identify fluctuations in revenue and costs that may occur. By understanding the business cycle, companies can make adaptive and flexible budgets and be able to deal with changes in the business cycle.
2. Setting Priorities
Companies must determine priorities in the allocation of funds and take into account the risks and cyclicalities that may occur. Fund allocation priorities can be adjusted according to changes in the business cycle to optimize the use of resources.
3. Conduct Periodic Monitoring and Evaluation
Companies must periodically monitor and evaluate the realization of cyclical budgets. Monitoring and evaluation can be done by monitoring factors such as spending levels, return on capital, and financial ratios.
4. Mengadopsi Sistem Pengukuran Kinerja yang Akurat
Perusahaan harus mengadopsi sistem pengukuran kinerja yang akurat untuk memantau realisasi anggaran siklikal. Sistem pengukuran kinerja dapat mencakup faktor-faktor seperti tingkat pengeluaran, tingkat pengembalian modal, dan rasio keuangan.
5. Memperbarui Anggaran Secara Berkala
Perusahaan harus memperbarui anggaran secara berkala untuk mengikuti perubahan siklus bisnis. Dalam memperbarui anggaran, perusahaan harus mampu menyesuaikan alokasi dana dengan fluktuasi pendapatan dan biaya yang terjadi serta mempertimbangkan risiko dan unsiklusitas yang mungkin terjadi.
Example of Application of Cyclical Budget
The application of cyclical budgets can vary depending on the characteristics of a company’s business and industry. Here are some examples of implementing cyclical budgets in several industries:
1. Construction Industry
The construction industry is highly dependent on business cycles and market fluctuations. Therefore, companies in this industry can implement cyclical budgets by making budgets that are adaptive and flexible and able to deal with changes in the business cycle. Companies can allocate funds to projects that have great potential to generate high profits when the market is up, and withhold spending when the market is down.
2. Banking Industry
The banking industry is also heavily influenced by business cycles and market fluctuations. Companies in this industry can implement cyclical budgets by taking into account fluctuations in income and costs that may occur, and determine priority allocation of funds according to the risks and cyclicalities that may occur. In addition, companies can adopt an accurate performance measurement system to monitor cyclical budget realization.
3. Technology Industry
The technology industry is very dynamic and subject to rapid change. Companies in this industry can implement cyclical budgets by making budgets that are adaptive and flexible and able to deal with market changes. Companies can allocate funds for product development and innovation, as well as adjust the allocation of funds to the fluctuations in income and costs that occur.
4. Retail Industry
The retail industry is also highly dependent on business cycles and market fluctuations. Companies in this industry can apply cyclical budgets by taking into account fluctuations in income and costs that may occur and determine priority allocation of funds according to the risks and cyclicalities that may occur. In addition, companies can update budgets regularly to keep up with market changes.
In conclusion, the cyclical budget is a budget management approach that can help companies deal with market fluctuations and business cycles. By applying the basic principles of cyclical budgeting such as making budgets that are adaptive, flexible, and take into account fluctuations in income and costs that may occur, companies can increase the effectiveness of the use of resources and optimize financial performance.
However, keep in mind that implementing a cyclical budget cannot be done instantly and requires commitment and patience from management. In addition, companies also need to understand the characteristics of the business and industry they are running in order to be able to implement the right cyclical budget.
By implementing cyclical budgets effectively, companies can increase their resilience to unavoidable market fluctuations and business cycles. In the long term, this will help the company achieve greater success and be able to maintain its position in a competitive industry.
