The main budget of the company involves all spheres of its activity. Knowledge of the algorithm of its making gives an opportunity to give an idea of the structural aspects of the company budget, and also take into account the strengths and weaknesses that govern your business. Now, you are going to rule the course of events. Therefore, let’s make budget for the next year and distribute the roles.
Process participants
The budget is a plan in a quantitative, usually monetary, expression for a certain period of time. Most organizations make budgets once a year, but there are also those that follow the practice of making quarterly budgets for the whole year ahead.
Management control focuses on the centres of responsibility. This record distinguishes four types of liability centres (structural units): revenue canter, cost centre, profit centre and investment centre. Each of them is headed by a manager. Centres of responsibility prepare and develop budgets.
Carefully prepared budget is the best standard to compare actual results, because it includes an assessment of the performance of all variables that are the basis for the forecast at the time of budget preparing. Budgets are not only used as tools for plans preparing and coordinating, but also as means of monitoring the current activity of the company.
The budget work is usually managed by the budget committee. It gives recommendations on the main directions of the company. After approval by the director, the budget committee sends them to different centres of responsibility. Later it also coordinates individual budgets prepared by these centres.
The head of the budget committee creates a system of target management. This system points to certain goals that are to be achieved by the responsibility centre manager during the budget period. However, it should be noted that such activity can only be successful if it receives active support from top management and is an integral part of the system of managerial control. The head of the budget committee also groups the budget figures and ensures the provision of own part of the budget by each manager of the responsibility centre.
Budget cycle
An integral part of the budget is the accounting information. However, such information can not adequately reflect the results of the activities of the centres of responsibility. One way to overcome this inconsistency is to combine the accounting information with the results of the managers of such centres.
The final version of the budget should be approved by the general director.
The budget cycle consists of the following steps:
- planning of the company activity;
- preparation of projects of separate budgets;
- preparation of project of general budget;
- making adjustments and approval of budgets;
- designing feedback and accounting for changing conditions;
- approval of the budget.
Budget Functions
The budget has the following functions:
- contributes to preparing and coordinating of short-term plans;
- ensures the connection of these plans with different centres of responsibility;
- encourages management to achieve the objectives of their responsibility centres;
- controls current activities;
- evaluates the activities of the centres and their managers.
In order to make a budget of the company, it is necessary:
- to develop sales plans for goods, finished goods, services, works and services;
- on their basis, develop plans for procurement of goods, production of finished goods, services;
- to make a plan-calculation of direct production and variables of total production costs per unit of output, as well as constant total production costs;
- to calculate the planned production cost of finished products, services, works on the basis of the plan of production (works, services);
- to prepare plans of sales expenses, administrative costs, other operating expenses;
- to calculate the planned cost of sold products, works, services, goods on the basis of sales plans and calculation of the average cost of production;
- to create a plan for other expenses not related to operating activities;
- to prepare a plan of expenses, which are subject to write-off at the expense of profit;
- if necessary, calculate the break-even points taking into account the planned profit associated with the release and sale of finished products (works, services) in quantitative and monetary terms;
- to carry out the preparation of the budget making for cash flow, including the development of a plan for the receipt of funds from buyers of products, goods, works, services, as well as a plan for other proceeds of funds.
Full budget “package”
The full budget package consists of operational and financial budgets. The operational budget consists of:
- sales budget;
- production budget;
- production inventory budget;
- procurement budget (use of materials or direct costs of materials);
- budget of total production costs;
- budget of labor costs;
- budget for commercial spending;
- budget of general and administrative expenses;
- forecast report on profit and loss.
The financial budget is also divided into several budgets:
- budget of capital investments (investment budget);
- budget of cash flow;
- forecast balance.
