Drawing up a budget.[check] This checklist is for managers who have responsibility for drawing up and presenting a budget. Budgeting is at the heart of the way organisations measure what they want to achieve. It is a key planning device and one that organisations are increasingly democratising. Drawing up a budget is no longer the sole province of accountants and finance directors. These days everyone in the organisation has a role to play in drawing up a budget. There is no room for financially naive naive - Untutored in the perversities of some particular program or system; one who still tries to do things in an intuitive way, rather than the right way (in really good designs these coincide, but most designs aren't "really good" in the appropriate sense). managers in today's organisations. Drawing up a budget involves a mix of number skills and people skills like negotiation and listening--it is not a mechanistic mech·a·nis·tic adj. 1. Mechanically determined. 2. Of or relating to the philosophy of mechanism, especially one that tends to explain phenomena only by reference to physical or biological causes. process. It is dynamic and involves managers throughout the organisation. Definition A budget is a statement of expenditure or income that has been allocated under a set of headings, for a set period of time. Advantages of budgeting Budgets: * are a key tool in the achievement of a company's strategic plan * help managers in different parts of the organisation to coordinate their activities * are a way of helping managers take financial responsibility * are an effective way of allocating funds and planning * are a way of communicating important financial information * are motivating--they set clear goals * help managers to think about the future and set plans * help managers to measure their own performance and the performance of their team. Disadvantages of failing to budget (or budgeting poorly) Poor budgeting or no budgeting at all presents a whole range of disadvantages including: * unreliable financial information * a breakdown in financial control. Action checklist 1. Identify the key plans and objectives for the organisation You need to identify these objectives so that you know what over-riding factors to consider when preparing your budget. Budgeting is to some extent a secondary process--secondary to the strategic or business plans of the organisation. Only when these are clear can a suitable budget be prepared. Is it, for example, a budget for growth or for standing still? This will affect the way you draw up figures. 2. Determine the key or limiting factors A factor or condition that, either temporarily or permanently, impedes mission accomplishment. Illustrative examples are transportation network deficiencies, lack of in-place facilities, malpositioned forces or materiel, extreme climatic conditions, distance, transit or overflight rights, Every organisation has some factors which limit its growth. In most cases this is the volume of sales, or the number of customers, or the amount of manufacturing plant available. Whatever they are, these key factors have significance for planning and budgeting. There's no point drawing up a superb budget based on selling a high volume if either it is unrealistic to reach this level of sales or your organisation couldn't handle the work load to reach the figure. 3. What is coming in? Look at the range of sources--are you generating funds, or is money allocated at the beginning of each year? Will you really get in all the money you have noted down, or will some come in the next financial year, or fall through? How much of it is guaranteed income? 4. What is going out? Estimate your expected costs. Break down costs under different headings. The range of cost headings usually include those related to: * staffing, wages, pensions, training etc. * premises, rent, repairs, heating etc. * a company's legal duties * materials used--stationery, telephone, raw materials * any other business costs, such as insurance, company tax etc. The general principle is to divide the budget up under whatever headings seem sensible to you--but, as organisations often group headings together, ensure there is a degree of commonality com·mon·al·i·ty n. pl. com·mon·al·i·ties 1. a. The possession, along with another or others, of a certain attribute or set of attributes: a political movement's commonality of purpose. across the company. Look at last year's budget and use the headings in it as a starting point Noun 1. starting point - earliest limiting point terminus a quo commencement, get-go, offset, outset, showtime, starting time, beginning, start, kickoff, first - the time at which something is supposed to begin; "they got an early start"; "she knew from the . 5. Think through the fixed and variable costs There are two types of costs: * fixed costs--those costs you have no matter how much extra work the organization handles, such as permanent staff costs * variable costs--costs that are dependent on the organization's level of work, such as how much raw material is bought or how much advertising is carried out. Ask your finance section to help you identify your fixed and variable costs. 6. Decide how to draw up the budget There are different theories about how you should begin to draw up a budget. Incremental Additional or increased growth, bulk, quantity, number, or value; enlarged. Incremental cost is additional or increased cost of an item or service apart from its actual cost. budgeting--this is based on using last year's figures. If you use this method you would base a budget on how last year's went--with, of course, an adjustment to take things like inflation into account. This is a quick and simple way of putting together a first draft of a budget but if last year's budget was wrong you keep adding to your mistakes. It is also a conservative approach, making the assumption that present objectives are right and that there is a high degree of continuity. If you are using an incremental approach, work out how far last year's budget actually reflected reality. Write down: * the budget * the way it actually worked--what you actually spent * the variance--how far was the budget out, and why? Zero-based budgeting--here an analysis of each cost from fresh at the start of each year is made. Analyse an·a·lyse v. Chiefly British Variant of analyze. analyse or US -lyze Verb [-lysing, -lysed] or -lyzing, each cost as the picture looks now rather than referring to the budget of the previous year. This is a fundamental approach, requiring you to justify every item and redefine Verb 1. redefine - give a new or different definition to; "She redefined his duties" define, delimit, delimitate, delineate, specify - determine the essential quality of 2. your objectives. 7. Collect all the information you need to set this year's budget Look at last year's budget and learn what you can for this year's. Make sure you have spoken to all the stakeholders Stakeholders All parties that have an interest, financial or otherwise, in a firm-stockholders, creditors, bondholders, employees, customers, management, the community, and the government. before drawing up the budget to make sure they've had an input and you have not missed anything. Look at the organisation's objectives and targets to see if and how your budget needs to be adjusted or reconstructed re·con·struct tr.v. re·con·struct·ed, re·con·struct·ing, re·con·structs 1. To construct again; rebuild. 2. . Assess all external and internal factors which may have a bearing on your performance. These may include: the rate of inflation, bank lending rates, trade prospects which are forecast for the following year, and whether you wish to stimulate the market (and therefore the resources, money, people and equipment necessary to do so). Budgeting for growth also means having the available resources to handle the increased levels of business if the marketing works, otherwise you will be stimulating a demand you cannot meet. 8. Ask some important questions The following questions will help to prepare the budget accurately. * Am I clear about strategic objectives and how they affect my area of responsibility? * Have I accurately forecast the number of people the job requires to meet objectives? * Are there likely to be any changes? * Am I clear about the income? * Am I clear about outgoings? * Are there any factors on the horizon that might throw the forecast into chaos? 9. Draw up the budget Keep detailed notes on why you have included the figures you have in your budget. It may seem obvious when you write it down, but you might not remember how you calculated your budget in six months' time. Remember to build in an allowance for contingency--the "what if"--for things that may go wrong. This may reflect on the revenue targets foreseen fore·see tr.v. fore·saw , fore·seen , fore·see·ing, fore·sees To see or know beforehand: foresaw the rapid increase in unemployment. if levels of business do not meet expectations, or on controlling expenditure early in the financial year until you obtain a clearer picture of how your budget is performing. 10. Build in budget control parameters Control parameters In a nonlinear dynamic system, the coefficient of the order parameter; the determinant of the influence of the order parameter on the total system. See: Order Parameter. You or your finance department will need to track income and expenditure against the budget. This may be monthly, weekly or even daily, depending on the business. See the checklist on controlling budgets for more information. 11. Present the budget If you have to make a presentation on the budget to senior managers or colleagues in addition to the written statement, then make sure you present a picture of reality, with possible down-turns and problems, rather than attempting to impress. If it looks optimistic op·ti·mist n. 1. One who usually expects a favorable outcome. 2. A believer in philosophical optimism. op , say so and why; if it looks pessimistic pes·si·mism n. 1. A tendency to stress the negative or unfavorable or to take the gloomiest possible view: "We have seen too much defeatism, too much pessimism, too much of a negative approach" , make sure you convey the appropriate message. Dos and don'ts for drawing up a budget Do * Be realistic. * Take last year's budget and actual result (what you really spent) into account. * Be aware of fixed and variable costs. * Develop budget headings that work, both for you and for the organisation as a whole. * Collect information thoroughly. * Decide whether to go for a zero-based or incremental approach. Don't * Be over-optimistic. * Leave too little time. * Draw up a budget without involving others. Useful reading Better budgeting: a report on the better budgeting forum from CIMA and ICAEW ICAEW Institute of Chartered Accountants in England & Wales London: Chartered Institute of Management Accountants The Chartered Institute of Management Accountants (CIMA) is a UK based professional body offering training and qualification in management accountancy and related subjects, focused on accounting for business; together with ongoing support for members. and Institute of Chartered Accountants char·tered accountant n. Chiefly British Abbr. CA A member of one of the institutes of accountants granted a royal charter. in England and Wales England and Wales are both constituent countries of the United Kingdom, that together share a single legal system: English law. Legislatively, England and Wales are treated as a single unit (see State (law)) for the conflict of laws. , 2004 Beyond budgeting: how managers can break free from the annual performance trap, Jeremy Hope and Robin Fraser Robin Fraser (born December 17, 1966, in Kingston, Jamaica) is a former soccer defender, one of the best defenders in Major League Soccer's history. Fraser played college soccer at Florida International University from 1984 to 1988. Boston Mass: Harvard Business School Harvard Business School, officially named the Harvard Business School: George F. Baker Foundation, and also known as HBS, is one of the graduate schools of Harvard University. Press, 2003 Budgeting for non financial managers: how to master and maintain effective budgets, Iain Maitland London: Prentice Hall Prentice Hall is a leading educational publisher. It is an imprint of Pearson Education, Inc., based in Upper Saddle River, New Jersey, USA. Prentice Hall publishes print and digital content for the 6-12 and higher education market. History In 1913, law professor Dr. , 2000 Managing budgets, Stephen Brookson London: Dorling Kindersley, 2000 Mastering spreadsheet spreadsheet Computer software that allows the user to enter columns and rows of numbers in a ledgerlike format. Any cell of the ledger may contain either data or a formula that describes the value that should be inserted therein based on the values in other cells. budgets and forecasts: how to save time and gain control of your business, Malcolm Secrett London: Prentice Hall, 2000 Total business budgeting: a step-by-step guide with forms, 2nd ed, Robert Rachlin New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of NY: John Wiley John Wiley may refer to:
Thought starters * Do you understand the major objectives laid down within your organisation's current strategic plan? * Do you know how your area of responsibility fits within the current strategic plan? * Have you listened carefully to all the stakeholders? * Have you checked last year's budget? * Have you drawn up a list of budget headings? * Have you left enough time for the process? |
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