The budgeting process can range from the fairly informal process undergone by a small firm, to an elaborately detailed, several-month procedure employed by large firms. Key features of the process include directing and coordinating the compilation of the budget.
Directing and Coordinating
Every organization must have someone responsible for directing and coordinating the overall budgeting process. This budget director is usually the controller or someone who reports to the controller. The budget director works under the direction of the budget committee. The budget committee has the responsibility to review the budget, provide policy guidelines and budgetary goals, resolve differences that may arise as the budget is prepared, approve the final budget, and monitor the actual performance of the organization as the year unfolds. The budget committee is also responsible for ensuring that the budget is linked to the strategic plan of the organization. The president of the organization appoints the members of the committee, who are usually the president, vice presidents, and the controller.
Types of Budgets
The master budget is a comprehensive financial plan for the year made up of various individual departmental and activity budgets. A master budget can be divided into operating and financial budgets. Operating budgets are concerned with the incomegenerating activities of a firm: sales, production, and finished goods inventories. The ultimate outcome of the operating budgets is a pro forma or budgeted income statement. Note that “pro forma” is synonymous with “budgeted” and “estimated.” In effect, the pro forma income statement is done “according to form” but with estimated, not historical, data. Financial budgets are concerned with the inflows and outflows of cash and with financial position. Planned cash inflows and outflows are detailed in a cash budget, and expected financial position at the end of the budget period is shown in a budgeted, or pro forma, balance sheet. Exhibit 8-2 illustrates the components of the master budget.The master budget is usually prepared for a 1-year period corresponding to the company’s fiscal year. The yearly budgets are broken down into quarterly and monthly
Directing and Coordinating
Every organization must have someone responsible for directing and coordinating the overall budgeting process. This budget director is usually the controller or someone who reports to the controller. The budget director works under the direction of the budget committee. The budget committee has the responsibility to review the budget, provide policy guidelines and budgetary goals, resolve differences that may arise as the budget is prepared, approve the final budget, and monitor the actual performance of the organization as the year unfolds. The budget committee is also responsible for ensuring that the budget is linked to the strategic plan of the organization. The president of the organization appoints the members of the committee, who are usually the president, vice presidents, and the controller.
Types of Budgets
The master budget is a comprehensive financial plan for the year made up of various individual departmental and activity budgets. A master budget can be divided into operating and financial budgets. Operating budgets are concerned with the incomegenerating activities of a firm: sales, production, and finished goods inventories. The ultimate outcome of the operating budgets is a pro forma or budgeted income statement. Note that “pro forma” is synonymous with “budgeted” and “estimated.” In effect, the pro forma income statement is done “according to form” but with estimated, not historical, data. Financial budgets are concerned with the inflows and outflows of cash and with financial position. Planned cash inflows and outflows are detailed in a cash budget, and expected financial position at the end of the budget period is shown in a budgeted, or pro forma, balance sheet. Exhibit 8-2 illustrates the components of the master budget.The master budget is usually prepared for a 1-year period corresponding to the company’s fiscal year. The yearly budgets are broken down into quarterly and monthly
Also read gathering information for budgeting.
budgets. The use of shorter time periods allows managers to compare actual data with budgeted data as the year unfolds and to make timely corrections. Because progress can be checked more frequently with monthly budgets, problems are less likely to becometoo serious.
Most organizations prepare the budget for the coming year during the last four or five months of the current year. However, some organizations have developed a con- tinuous budgeting philosophy. A continuous (or rolling) budget is a moving 12- month budget. As a month expires in the budget, an additional month in the future is added so that the company always has a 12-month plan on hand. Proponents of continuous budgeting maintain that it forces managers to plan ahead constantly. The majority of CFOs believe that rolling forecasts are very valuable, and companies that do use them typically roll the forecasts out for five or six quarters rather than four.
Similar to a continuous budget is a continuously updated budget. The objective of this budget is not to have 12 months of budgeted information at all times, but instead to update the master budget each month as new information becomes available. For example, every autumn, Chandler Engineering prepares a budget for the coming year. Then at the end of each month of the year, the budget is transformed into a rolling forecast by recording year-to-date results and the forecast for the remainder of the year. In essence, the budget is continually updated throughout the year.
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