In the process of preparing the operational budget, the projected sales and production volumes are transformed into quantitative estimates of revenues and expenditures for each of the company’s operating divisions.What should be remembered when making such a budget?
Component of planning
The operational budget shows planned operations for the coming year for a segment or a separate function of the company. It is made on the basis of the guidelines and plans approved in the budget preparation process. The operational budget is actually developed by all the responsibility centres, and each of them has not only its own goals and tasks, but also the volumes of information processed. In the future, all their developments are combined into a single consolidated budget of the enterprise. At a later stage, all their developments are combined into unified consolidated budget of the company. This process is coordinated by the budget committee. Not only financial and production responsibility centres make the main work in creating the budget, but also the marketing department. Speed, reliability and accuracy in the calculations contribute to the quality of planning.
Making this budget can be considered both as an accounting process and as a management process. The principal difference is that budget data reflect the planned activity of the company in the future, and not a record of what has happened in the past.
Everything is interconnected in the operational budget, as in the entire budget of the company. The data of the operational budget is significantly affected by the planned sales volume. The procurement plan is significantly influenced not only by the volume of production, but also decisions related to inventory, etc. In this regard, before the making of the operational budget, the procedure for the creation of specific parts of this budget and the period during which preparation each of them must be completed.
Sales Budget
The forecast of sales volume is a necessary preliminary stage of work on preparation of the budget of the company. The volume of sales and its commodity structure predetermine the level and general nature of the company. Thus, a sales plan that affects most other plans should be made at the very beginning of the budget preparation process. When its preparing, it is necessary not only to take into account sales levels for previous periods, but also to analyze a number of factors, each of which can significantly affect both sales volume and its dependence on product profitability.
The reliability of the sales forecast is enhanced by the use of combinations of expert and statistical methods. The given budget is made taking into account a level of demand for production of the company, geography of sale, categories of buyers, seasonal factors. It also includes the expected cash flow from sales, which will then be included in the revenue side of the cash flow budget.
Almost all companies have difficulties when making the sales budget. This is due to the fact that the incomes from the sale of products depend on the actions of the clients of the company, which can not be managed directly. The amount of planned costs is determined primarily through the activities of the company itself (except the prices of purchased goods at the entrance) and therefore can be planned with greater certainty.
In addition, it should be remembered that sales as a business process for all companies are very important. Therefore, the development of the model of the sales budget should be taken very seriously. Especially by those companies, whose main activity is the sale of products. In this situation, the main error in the calculation of final financial budgets is set by the sales budget. This means that if the sales budget is not compiled correctly, then no matter how detailed the enterprise plans all other budgets, the final calculation error will be significant, since the indicators of most budgets depend on the sales budget indicators.
Procurement Budget
The procurement budget is the procurement plan for products by product line or by major suppliers. It shows how much and what products should be acquired by the company not only from external but also from domestic suppliers.
The procurement budget is made by the centre of responsibility related to procurement, based on the sales budget, as the volume of purchases directly depends on the volume of sales. At the same time, the volume of purchases of raw materials and materials depends on the expected volume of their use, as well as on the expected level of stocks. The procurement budget, as a rule, is made taking into account terms and an order of repayment of accounts payable for materials.
The formula for calculating the volume of purchases and setting the calculated data to the budget is as follows:
Procurement volume = expected use volume + estimated stock level at the end of the period - stocks at the beginning of the period.
Production Budget
This is a plan of output in physical terms, which is made based on the sales budget. It takes into account not only production capacity, increase or decrease in inventories (the budget of industrial reserves), but also the value of external purchases.
The required volume of output is calculated by the following formula:
The required volume of output = estimated stock of finished products at the end of the period + sales volume for the period - stock of finished goods at the beginning of the period.
Inventory budget
This budget contains the information necessary for the preparation of the forecast profit and loss account. Such information includes:
- data on the production cost of sales;
- forecast balance sheet - data on the state of the normalized working capital (raw materials, materials and finished goods stocks) at the end of the planned period.
The volume of unfinished production is determined on the basis of technological features of manufacturing products.
Budget of general production costs
This budget consists of the volume of all costs associated with the production of products, with the exception of direct costs for materials and labor. General production costs consist of a constant part and variable part. The constant part is planned based on the needs of production, the variable part − as a normative component.
Labor budget
Direct labor costs include the costs of salaries of the main production personnel. The budget for labor costs is prepared on the basis of the production budget, data on labor productivity and wage rates. It should be noted that in the salary budget of the main production personnel, it is necessary to distinguish two components:
- fixed part of labor payment;
- piece-rate part of labor payment.
Budget of commercial expenses
The budget of commercial expenses takes into account all costs associated with the sale, promotion and storage of goods. When making this budget, fixed costs are allocated to a separate group: advertising and marketing costs and storage costs for goods in safe custody. The magnitude of these costs is planned on the basis of management decisions. For example, a decision can be made to change the area of the leased premises.
The budget of commercial expenses is formed taking into account variable expenses related to commission, packing costs, warehousing, transportation of goods to customers and depends on the volume of sales and purchases. The budget in question is related to the budget of variable general production costs.
Commercial expenses are grouped into categories, the main ones are types of products, categories of customers.
Budget of general and administrative expenses
This budget shows all expenses not related to the commercial activities of the company. General and administrative expenses are permanent. The budget of general and administrative expenses is made on the basis of budgets prepared by the responsibility centres.
Forecast report on profit and loss
The named report shows what income the company received and what expenses it incurred during the reporting period. Information on income comes from the sales budget, and information on costs associated with the current activities of the company − from the budget of commercial expenses and the budget of general and administrative expenses.
The preparation of the forecast report on profit and loss is the last stage in the preparation of the operational budget.
