The Organization of Budgeting

The budgeting process itself requires careful organization. In large firms, this process is often in the hands of a budget committee which acts through the budget officer whose function it is to co-ordinate and control the budgeting process for the whole organization. Departmental budget estimates are requested from divisional managers, who in their turn collate this information from estimates submitted to them by their own departmental managers. Hence, budget estimates are based on information which flows upwards through the organization to the budget committee. The budget committee is responsible for co-ordinating this information, and resolving any differences in consultations with the managers involved. The final budget proposal is presented to the board of directors, for its final approval.

Steps in budgeting

The first stage of a budgeting exercise is the determination of the 'key' factors or constraints which impose overall limits to the budget plan. Among these factors are the productive capacity of the plant, the finances available to the firm, and, of course, the market conditions which impose a total limit on the output which the firm is able to sell. Normally from a management point of view, the critical question is 'what is the firm able to sell in the budget period?', and this question summarizes all the limits to the budget plan. It is for this reason that the sales budget is at once the starting point and the fulcrum of the budgeting process.

The arrows indicate the flow of relevant information. Once the level of sales is established, selling and distribution costs may be ascertained. The production budget itself is determined by the sales forecast, the desired level of inventory of finished goods and plant capacity. From the production budget may be estimated the production costs, and the cost schedules for materials, labour and overheads.

In addition, the budgeting process for capital expenditure reflects decisions taken in developing the long-range plan. The capital expenditure budget is concerned with expenditure during the budget period on the maintenance and improvement of the existing productive capacity. Associated with this budget are research and development costs for improving methods of production and product improvement as well.

From a financing point of view, the cash surplus or deficits arising out of the overall budget are revealed by the cash budget which incorporates all cash revenues and cash expenditures. This enables the firm to arrange its financial needs accordingly.

Finally, the projected results in terms of the overall net profit, and the changes in the structure of the firm's assets and liabilities are expressed in the budgeted income statement and the budgeted balance sheet at the end of the budget period.

This description of the manner in which the budget co-ordinates the various activities of the firm is a simplified one. Budgetary planning is an activity which is of critical importance to the firm, and the problems involved are often complex and difficult ones to resolve. A firm's sales policy, for example, cannot be considered in isolation from its pricing policy and its cost structure. The firm's planned costs in relation to the required output may be too high to reach the profit target. If this should be the case, pricing and advertising policies may require further scrutiny, both planned and development costs may have to be reduced, and the final product itself may have to be modified. The role of the budget committee is, therefore, a very important one: not only has it to harmonize all the divisional budgets into an overall planning framework, but it has to deal with the numerous adjustments which may have to be made if the overall budget fails to meet some of the firm's stated objectives. Hence, the role of the budget committee is not only important in a practical sense: it affects important and sensitive areas of policy making and management.


Interested in the Trueblood Report

Read on: Budgetary Planning

The process of budgeting focuses on the short term, normally one year, and provides an expression of the steps which management must take in the current period if it is to fulfil organizational objectives.It is useful to distinguish between the two functions-planning and control. Applying a similar distinction to budgeting, we may examine in turn the functions of budgetary planning and budgetary control. In this webpage, we deal with the technical aspects of budgeting.

The nature of budgetary planning

We have found that long-range planning involved the determination of corporate... see: Budgetary Planning