Budget Committee

What Is a Budget Committee?

A budget committee is a group of people within an organization that creates and maintains fiscal responsibility for that entity. In a company, this committee usually consists of top management along with the chief financial officer (CFO). Budget committees typically review and approve departmental budgets that are submitted by the various department heads.

The budget committee may also create and update the budget manual, which is a complex set of guidelines and instructions used by large organizations to prepare budgets.

Understanding Budget Committees

A budget committee is an official group that creates and oversees the standards and best practices to implement and update an organization's spending and resource allocation plans while maintaining fiscal responsibility. Budget committees play a key role in the success or demise of a company or other entity that relies on generating and spending cash flows in order to remain operational. This committee is charged with keeping organizational budgets on track, which then ensure smooth operation and financial solvency and to stave off any financial problems before they get out of hand.

In addition, the budget committee writes and edits the company budget manual and makes sure the departments are adhering to their submitted yearly budgets.

The budget committee has a unique perspective in that they are privy to all of the financial comings and goings of an organization. They see the whole picture, whereas people in individual departments will only see their particular segment of the company. Indeed, the budget committee and the accounting and finance departments are often the only entities within the organization that can see the entire financial picture of the firm.

Example of a Budget Committee in Practice

For example, the budget committee for the hypothetical company Wendell's Widget Makers, Inc. is in charge of overseeing the yearly budget formation for every department within the organization and approving the budgets. At the beginning of the year, they determine that they can allot $500,000 to various divisions in the firm. The sprocket division is undertaking a bold new research & development project for a new type of sprocket while the widget division is operating as business as usual.

The committee, following the guidelines in their budget manual, allocates $350,000 to the sprocket division, with 60% of that earmarked for the R&D project. $100,000 is allocated to the widget division to fund operations, while the remaining $50,000 is kept on hand to pay firm-wide taxes.