Recipe for a Good Budget – Corporate Overhead Budgeting

January is the time to finalize financial plans for the new year. We want to share key insights on preparing a corporate overhead budget.

WHAT ARE INDIRECT COSTS?

Direct costs are associated with generating company revenue, whereas indirect costs are additional expenses resulting from business operations.

These costs may include expenses related to management, administration, IT, accounting, office maintenance, or human resources. Due to their nature, proper planning of these costs can improve expense control and optimize overall organizational performance.
Budgeting these costs is a crucial element of financial planning in medium and large enterprises.

STAGES OF THE CORPORATE OVERHEAD BUDGETING PROCESS

1. Identifying Overhead Cost Categories

The first step is to define and classify overhead cost categories. Examples include:

•    Administrative costs – salaries for administrative, HR, IT, and accounting staff.
•    Office and infrastructure maintenance – rent, utilities, building maintenance, security.
•    Technology costs – software licenses, servers, computer equipment, IT support.
•    External services – consulting, legal, audit costs, outsourced processes.
•    Training costs – investments in employee development, courses, and training.

Each department generating overhead costs should provide forecasts for the upcoming budget period.

2. Collecting Historical Data

Before planning future expenses, historical data should be analyzed, including:

•    Past expenditures in each category.
•    Factors influencing cost changes over time, such as energy price increases, inflation, staffing changes.

This analysis helps identify the most significant costs and unexpected expenditures.
In INTENSE Platform, the reporting module provides comparative analyses, tracking both current cost execution and year-over-year results.

3. Forecasting Future Costs

Using historical data and company growth plans, future costs are projected. Key considerations include:

•    Changes in employment structure – recruitment plans may increase salaries and benefits costs.
•    New company initiatives – such as marketing campaigns or IT investments.
•    Inflation and external factors – expected increases in energy, rent, or external service costs.

Forecasting methods may include:

•    Incremental budgeting – based on previous expenditures.
•    Zero-based budgeting – reassessing each cost item from scratch to eliminate unnecessary expenses.

4. Allocating Overhead Costs to Departments or Projects

Many organizations distribute overhead costs among different departments or projects based on resource usage. Common allocation methods include:

•    Employee-based allocation – HR and administration costs distributed by headcount.
•    Office space-based allocation – office maintenance costs assigned per department’s office space.
•    Technology usage-based allocation – IT costs allocated based on the number of users.

A well-designed cost allocation system increases transparency and accountability.

5. Budget Review and Verification

Once the initial forecasts are prepared, the budget goes through a review process. Key decision-makers such as executives, CFOs, financial controllers, and department managers:

•    Prioritize expenses – some costs undergo additional scrutiny or negotiations.
•    Consolidate and recalculate budgets to determine the total scale of corporate overhead costs.

6. Budget Approval

After reviews and potential revisions, the company’s management approves the final corporate overhead budget. This approval signifies the organization's agreement to allocate the necessary resources for covering these costs in the upcoming period.

7. Monitoring and Budget Execution Control

Once approved, the budget remains dynamic. Ongoing monitoring and comparison with planned expenses are crucial.
This involves regular financial reporting – monthly, quarterly, or semi-annual budget reviews. Variance analysis identifies areas with excessive spending or savings, leading to corrective actions such as cost reductions in other areas.

8. Performance Analysis and Optimization

At the end of the fiscal year or budget cycle, an efficiency analysis is conducted to assess the budgeting process. Key questions include:

•    Could administrative costs have been reduced through process automation?
•    Was IT resource allocation effective?
•    What cost-saving measures from the previous period were successful?

SUMMARY

Corporate overhead budgeting involves not only forecasting and planning expenses but also continuous monitoring, analysis, and optimization. Accuracy, departmental accountability, and control at every stage are essential.
Effective cost management can significantly impact an organization’s financial stability, ensuring better resource utilization and improved operational efficiency.

INTENSE Group Team