Preparing financial budgets can be a challenge for any company. How does an accountant ensure that financial budgets are robust, and that variations from sales targets and budgeted expenses do not materially affect profit targets? Designing a robust budget should involve every manager in the company.
Three types of budgeting processes give rise to the quality of the budget preparation.
Type 1 Budget process.
The accountant obtains direction from top management on sales and profit targets for the planning period and pulls together a fair financial budget by referring to historical data available from the company’s records. He is able to show management the breakdown of the financial budget, and once agreed, he will update the approved budget in the financial systems, and file the approved copies. The sales managers are informed their sales targets. There is very little involvement in budgeting by other managers outside of the accounting or planning department.
I have come across managers in my consulting practice where operational managers only have a vague idea of their cost budgets, and have little responsibility in managing costs in their departments. Sales managers, although they know their sales targets, lack clarity on where (which market) they are going obtain their sales to meet their targets.
Type 2 Budget process
A good accountant would involve mid level management in preparing the financial budget. He may use historical data where costs are constant in nature, and also ask for the variations expected by managers for their functions due to operational plans. He may use activity based costing, or zero based budgeting. Whichever method he uses, he records the figures arrived at as budget assumptions. For sales budgets, he asks for input from the sales and marketing managers.
As long as there is an increase in sales targets compared to the current year, this is the accepted figure for preparing the company’s financial budget. Senior management may disagree and change the figures, and these are accepted, and the managers involved are informed. These is little agreement over the market and the needs of the company.
Type 3 Budget process
An experienced accountant with a strategic view goes through what I call the budget challenge process with the management team, and gain commitments to the budget. The budgets and business plans are then submitted to the board of directors or the top management team for final approval.
What is challenged in the budget process? For starters, an in-depth understanding of the market the company is targeting is necessary in market planning.
Sales and marketing managers need to go through a market analysis process to decide the coming year’s strategies. They write up a marketing plan. The company’s current situation needs to be understood in the contexts of the market and what it plans to do to beat competition. Thereafter, the resource requirements are planned and budget for. The accountant will then collate the plans and ensure that the financial figures duly represent the plans. The market and budget assumptions are also recorded. When senior management disagrees, the rationale for the figures can be reviewed before any change is made. There may be several iterations of the budget, and this process may take much longer than the earlier types of budget processes, but I think this is the process that any company need to undertake in order to arrive at a robust budget where every manager understands, and buys-in to the budget set. This is a challenge for any manager of the company, but well worth the effort in preparing for the new financial year.
If this is new to you, and you would like to embark on this process, but require assistance, contact us for an audit of your current budgeting and planning process.