Printer Friendly

Drawing up a budget.


Budgeting is at the heart of the way organisations measure what they want to achieve. It is a key tool in planning and integrating activities, allocating funds, and achieving strategic aims, and organisations are increasingly involving other staff, as well as accountants and finance directors, in drawing up a budget. For this reason, all managers are generally expected to have some financial knowledge in contemporary organisations, and to take some financial responsibility.

Drawing up a budget involves both number and people skills, such as negotiation and listening. It is not a mechanistic process, but a dynamic one, drawing managers throughout the organisation into considering their future plans and goals within the context of their organisation's strategy and aims.

This checklist is intended for managers who have responsibility for drawing up and presenting a budget.

National Occupational Standards for Management and Leadership

This checklist has relevance to the following standards: E: Using resources, units 1, 2


A budget is a statement of expected expenditure or income that has been allocated under a set of headings, for a set period of time.

Action checklist

1. Identify the key plans and objectives for the organisation

Key objectives need to be identified 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.

Should it be, for example, a budget for growth or for standing still? This will affect the way you draw up the figures.

2. Determine the key or limiting factors

Some key factors will limit growth in all organisations. Usual examples are the volume of sales, number of customers, or available manufacturing plant. Whatever the key factors are, they will have significance for planning and budgeting. There's no point in drawing up a budget based on selling a high volume, for example, if this is either unrealistic or impractical.

3. What is coming in?

Look at the range of income 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 and break them down under different headings. The range of cost headings usually include those related to:

* staffing,--e.g., wages, pensions, training

* premises--e.g., rent, repairs, heating

* a company's legal duties

* materials used -e.g., stationery, telephone, raw materials

* any other business costs--e.g., insurance, company tax.

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 consistency across the company. Look at last year's budget and use the headings in that as a starting point.

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.

Your finance department should be able 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 budgeting 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. Its main drawback is that, if last year's budget was wrong, you keep adding to your mistakes. It is also a conservative approach, based on 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 is used to give an analysis of each cost from the start of each year. Analyse each cost according to how the picture looks now rather than referring back to the previous year's budget. This is a fundamental approach, requiring you to justify every item and redefine 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 from that in preparing for this year's budget. Make sure you speak to all stakeholders before drawing up the budget, to ensure that 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.

Assess all external and internal factors that may have a bearing on your performance. These may include the rate of inflation, bank lending rates, trade prospects forecast for the following year, and whether you wish to stimulate the market (and therefore need to budget for the resources--money, people and necessary equipment--to do so). Budgeting for growth also means having resources available to handle the hoped-for increase in levels of business, so take care not to stimulate a demand you cannot meet.

8. Ask some important questions

The following questions will help you to prepare the budget more accurately.

* Am I clear about strategic objectives and how they affect my area of responsibility?

* Have I accurately forecast the number of people required 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 particular figures have been recorded in your budget. This may seem obvious when you write them down, but if asked to discuss the figures in six month's time, you may not remember how you calculated them. Build in a contingency allowance, just in case things go wrong, either through setting revenue targets below those forecast, in case levels of business do not meet expectations; or through controlling expenditure early in the financial year, until you get a clearer picture of how well you are performing to budget.

10. Build in budget control parameters

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 Checklist 043 on Controlling a Budget.)

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, make sure that you give a realistic picture (including possible down-turns and problems) rather than just attempting to impress. If the budget looks optimistic or pessimistic, say so and explain why.

Managers should avoid:

* drawing up a budget without involving others

* being over-optimistic

* collecting too little information for the budget.

Additional resources


Get to grips with budgets: how to take the stress out of working with numbers

London: Bloomsbury, 2005

Better budgeting: a report on the better budgeting forum from CIMA and ICAEW

London: Chartered Institute of Management Accountants and Institute of Chartered Accountants in England and Wales, 2004

Budgeting for non financial managers: how to master and maintain effective budgets, Iain Maitland

London: Prentice Hall, 2000

Managing budgets, Stephen Brookson

London: Dorling Kindersley, 2000

Mastering spreadsheet budgets and forecasts: how to save time and gain control of your business, Malcolm Secrett

London: Prentice Hall, 2000

This is a selection of books available for loan to members from the Management Information Centre. More information at:

Internet resource

Business Link The main site contains a guide on budgeting, under Finance and Grants / Financial Planning / Budgeting and Business Planning

Related checklist

Controlling a budget (043)
COPYRIGHT 2006 Chartered Management Institute
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2006, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:Checklist 042
Publication:Chartered Management Institute: Checklists: Managing Information and Finance
Geographic Code:4EUUK
Date:Jun 1, 2006
Previous Article:Making rational decisions.
Next Article:Controlling a budget.

Related Articles
Drawing up a budget.
Controlling a budget.
Drawing up a budget.
Controlling a budget.
Get the right people and get the people right.
Mapping an effective change programme.
Planning a conference.
Implementing an effective change programme.
Setting objectives.
Controlling a budget.

Terms of use | Privacy policy | Copyright © 2019 Farlex, Inc. | Feedback | For webmasters