The steps in preparing a budget
/Many organizations prepare budgets that they use as a method of comparison when evaluating their actual results over the next year. The process of preparing a budget should be highly regimented and follow a set schedule, so that the completed budget is ready for use by the beginning of the next fiscal year. Here are the basic steps to follow when preparing a budget:
Step 1. Update Budget Assumptions
Review the assumptions about the company's business environment that were used as the basis for the last budget, and update as necessary.
Step 2. Review Bottlenecks
Determine the capacity level of the primary bottleneck that is constraining the company from generating further sales, and define how this will impact any additional company revenue growth.
Step 3. Available Funding
Determine the most likely amount of funding that will be available during the budget period, which may limit growth plans.
Step 4. Step Costing Points
Determine whether any step costs will be incurred during the likely range of business activity in the upcoming budget period, and define the amount of these costs and at what activity levels they will be incurred.
Related AccountingTools Courses
Step 5. Create Budget Package
Copy forward the basic budgeting instructions from the instruction packet used in the preceding year. Update it by including the year-to-date actual expenses incurred in the current year, and also annualize this information for the full current year. Add a commentary to the packet, stating step costing information, bottlenecks, and expected funding limitations for the upcoming budget year.
Step 6. Issue Budget Package
Issue the budget package personally, where possible, and answer any questions from recipients. Also state the due date for the first draft of the budget package.
Step 7. Obtain Sales Forecast
Obtain the sales forecast from the sales manager, validate it with the CEO, and then distribute it to the other department managers. They use the sales information as the basis for developing their own budgets.
Step 8. Obtain Department Budgets
Obtain the budgets from all departments, check for errors, and compare to the bottleneck, funding, and step costing constraints. Adjust the budgets as necessary.
Step 9. Obtain Capital Budget Requests
Validate all capital budget requests and forward them to the senior management team with comments and recommendations.
Step 10. Update the Budget Model
Input all budget information into the master budget model.
Step 11. Review the Budget
Meet with the senior management team to review the budget. Highlight possible constraint issues, and any limitations caused by funding problems. Note all comments made by the management team, and forward this information back to the budget originators, with requests to modify their budgets.
Step 12. Process Budget Iterations
Track outstanding budget change requests, and update the budget model with new iterations as they arrive.
Step 13. Issue the Budget
Create a bound version of the budget and distribute it to all authorized recipients.
Step 14. Load the Budget
Load the budget information into the financial software, so that you can generate budget versus actual reports.
The number of steps noted here may be excessive for a smaller business, where perhaps just one person is involved in the process. If so, the number of steps can be greatly compressed, to the point where a preliminary budget can possibly be prepared in a day or two.
Related Articles
Advantages of a Good Business Plan