Log in / Register
Home arrow Business & Finance arrow Executive finance and strategy

How to budget

If you have responsibility for the entire budget process, the above stages should be followed in a logical order. However, it is more often the case that the manager is asked to budget after the objectives and strategy/tactics have been set. It is desirable that the setting of detailed objectives will have been done in consultation with the managers and staff who have to deliver results.

Whether starting with defined objectives or being given them, 'how to budget' becomes a matter of finding the figures to put on the budget forms.

Know objectives

To be able to budget, the objectives of the business ought to be known and expressed in a clear, quantified manner: for example, sales to grow by at least 10 per cent year on year; margins to be maintained at 15 per cent; costs to be minimized, that is, at last year's levels or lower.

Forecast figures

Particularly for sales, some forecasting methods as outlined above will be needed.

Use existing data

Past experience or experience from a similar business is a practical starting point. Even when taking this simple approach to budgeting, the point that each new period is new should not be forgotten, and updating previous figures by simple factors arising from sales volume increases or because of inflation is not good enough.

Completing the budget

Traditional management accounting texts talk of the 'master budget', which comprised sales budgets, production budgets, direct costs budgets, overhead budgets and so on. This breakdown may well still be appropriate for some businesses and a suitable structure for budget compilation is important.

At this stage we shall assume that the structure is in place, the question being how to put figures into the budget. There are really only two methods, as discussed above: (1) forecast and researching to come up with appropriate new figures; and (2) use existing data on income and costs, updating with relevant known factors. Updating existing data is obvious enough and for many situations may be both a practical and acceptable method.

Worked example: a budget process

You have taken over as manager of an established branch of a financial services company and have to produce the operating budget for next year. In spite of market conditions being tough, new business sales are expected to grow by 6 per cent minimum with the company-wide launch of new products. Head office has indicated that overall costs should be at a similar level to last year. This is at a time when general inflation is approximately 3 per cent:

1 Restate objectives for yourself and staff.

2 Review last year's figures - budget and actual. Why do cost headings exist? Challenge the level of sales and costs.

3 Discuss with staff how sales, particularly the new products, can be increased by local effort, and quantify any costs of local promotion and advertising. Is it possible that sales could be increased by more than 6%? Discuss how costs can be reduced. Obviously, focus on the larger figures first.

4 Prepare a draft budget-does this meet or exceed head office criteria?

5 Decide on necessary action to meet criteria - with possible further discussion with staff.

6 Implement the budget - have on record the final budget and the assumptions underlying the figures. Let staff know how the budget criteria will be met and the effort required from all.

The above illustration could be adapted to suit most budgeting situations.

Found a mistake? Please highlight the word and press Shift + Enter  
< Prev   CONTENTS   Next >
Business & Finance
Computer Science
Language & Literature
Political science