The Chief Financial Officer (CFO) of a business is in charge of preparing budgets for the whole firm. He is the person in charge of the Finance Department, so it is his job to do budgeting.
Budgets are typically set for both Sales Revenue and different types of Costs for the next 12 months. These will become the basis for creating the Annual Budget. Then, usually, the overall Annual Budget is broken down on a quarterly or monthly basis.
It is because when the overall financial plan is too long to motivate employees, it should be broken down into shorter spans of time. This becomes the basis for creating Monthly Budgets.
How to start preparing a budget for your business?
This is the typical budgeting process introduced in a few single steps. It shows how budgets are commonly prepared in a business organization.
Step 1: Set organizational objectives
The business will discuss and establish the most important organizational objectives for the upcoming year. These will be based on pre-established Mission Statement and Vision Statement of the business, and must aligned with current business objectives.
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Step 2: Establish the key factor
The key factor that budgeting will be based on is likely to be sales. Specifically, planned volume of sales (the number of products sold) and the value of sales revenue (all the income received from selling those products) expected next year. To determine what the firm is trying to achieve next year, it is important to look at the following factors:
LAST YEAR:
The performance of the business. Also, the major key events that happened in the past possibly affecting sales.
THIS YEAR:
All possible external factors and any changes in the external environment that are likely to affect the business.
NEXT YEAR:
Forecasts of the future sales based on the most up-to-date market research and all available sales data from the past.
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Step 3: Prepare Sales Budget first
The Sales Budget will be prepared first. Sales budgets are forecasts of the planned volume of sales and the value of sales revenue. The Sales Budget is usually prepared after brainstorming and discussion with Sales Managers of different products, regions and divisions.
It is absolutely crucial to construct the Sales Budget correctly. Accuracy is essential at this stage of budgeting. Any errors in the key-factor budget will distort all other following budgets making them inaccurate. The Marketing Budget, the Production Budget and the Staffing Budget will become incorrect too.
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Step 4: Prepare coordinated Subsidiary Budgets next
After completing the Sales Budget, preparing the Marketing Budget, the Production Budget and the Staffing Budget will follow. At this stage, coordination between the main Sales Budget and all of those subsidiary budgets is essential to ensure consistency. The subsidiary budgets are strictly based on the plans contained in the Sales Budget.
The Subsidiary Budgets include:
The Marketing Budget:
This allows planning of spending on all the marketing activities such as the amount planned for market research, prototype building, promotion, selling and distribution.
The Production Budget:
This allows planning of spending on stocks and capital equipment in relation to the level of output.
The Staffing Budget:
This allows planning spending on all labor-related expenses such as workforce planning as well as recruitment, selection and training of the workers. Also, possible spending on redundancy payments will be included in case some workers need to be laid off.
The task of coordination will most likely be done by a budgetary committee which will ensure that budgets do not conflict with each other and that the spending level planned does not exceed the available resources of the business. The budget holders will also be involved in this process to achieve delegated responsibility for budgets.
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Step 5: Prepare Master Budget at the end
Finally, the Master Budget is prepared. It is the overall or consolidated budget, comprised of all separate interdependent budgets. Master Budget contains the main details of all the other budgets such as the Marketing Budget, the Production Budget and the Staffing Budget.
In addition to the Master Budget, Profit and Loss Account (P&L Account) and Balance Sheet are also prepared and included in the Master Budget.
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Step 6: Get the final approval
Once the Master Budget is completed, it will be then presented to the owners or The Board of Directors (BOD) for the final approval. Once approved by the owners, or The Board of Directors and the CEO, the master budget will become the basis of the operational plans of each business division and department. It is very common in a firm to have budgets set for Cost Centers and Profit Centers.
The Chief Financial Officer (CFO) will have general control, management and responsibility of the Master Budget.
