- February 9, 2017
- Posted by: matogconsulting
- Category: Financial Advisory
Developing and Setting Budgets for SME’S
The term budget is known by almost everyone, but only few know exactly how it is developed, this article provides a step by step approach to budget development. Firstly, what is budget? Budget is a quantitative and qualitative statement of planned incomes and expenditures over a giving period of time, usually monthly, quarterly, semi annually and annually.
STEPS IN DEVELOPING AND USING BUDGETS
STEP ONE: SET UP A BUDGET COMMITTEE.
The first step in developing and using a budget in a typical company is to set up a Budget Committee. The members of the budget committee should include the heads of all the units or departments and should be chaired by the budget officer, who is usually the chief accountant or chief financial officer. The duty of the budget officer is to coordinate the budgeting processes, consolidate the budget of each units or departments into a single operational budget, ensure each unit budgets are consistent with the company’s capacity and constraints, monitor budget implementation processes and make recommendations for budget amendments where and when necessary, it is also his duty to carry out variance analysis to identify areas where budgeted outcome are different from the actual outcome, and carry out investigation into the factors responsible for the differences, especially if the deviations are very significant. The duties of other departmental or unit heads, is to prepare and present their individual budgets for the consideration and approval of the budget committee. For instance, the head of the sales and marketing department is responsible for preparing the sales budget, which comprises of the sales value and sales volume budgets. The head of the human resources department is responsible for preparing the personnel costs budget. The head of the production department is the officer in charge of preparing the production budget, which is made up of the production units and the production costs budgets. Also, the head of the purchasing and supply department is the one saddled with the responsibilities of preparing and presenting the purchases budget, which is made up of the raw material units and the raw material costs budgets.
STEP TWO: PREPARE FUNCTIONAL BUDGETS.
Functional budgets are the budgets for each area of operations it ranges from the sales budget, production budget, research and development budget, cash budget, etc.
Sales Budget: this is the estimate of sales volume and value for the period under consideration. When developing a sales budget, attention should be giving to the accuracy of the figures, because sales are the limiting factors on which other budgets are developed on. The budget may be arranged in accordance with products, customer segments, geographical regions, sales personnel, etc. In other to achieve a more realistic budget figures factors such as, past sales figures and trends, salesmen estimates, plant capacity, availability of raw materials and other supplies, general trade prospects, orders in hand, seasonal fluctuations, expected return on capital employed and competition should be taking into consideration.
Production Budgets: this is the estimate of the production units or quantity that a company will be able to produce deploying its current production capacity. The production budget is structured towards the realization of the sales budget and arrived at by deducting the estimated closing stock or inventory of finished goods for the period, from the sum of the estimated sales unit and the opening stocks or inventory of finished goods for the period
Production Cost Budget: this is the cost of producing the estimated unit of production for the period. It is comprise of the material cost budget, the labor cost budget and the overhead budget.
Purchases Budget: this is the estimate of the cost of purchasing the raw materials and other items necessary for actualizing the budgeted units of production for the period. The factors to be taken into consideration in preparing the purchases budget are; quantity and quality of each materials, required capital items, existing stocks and purchase orders already place, sources of supply and delivery time, inspection and storage capacity.
Research and Development Budget: this is the estimate of the amount of fund which the company is willing and able to spend on innovation. R&D is necessary to survive and beat the competition in the market and industry of operation. Therefore, substantial amount of money must be committed to it.
Others: The other forms of functional budget that may be prepared are; labor and personnel budget, manufacturing overhead budget, administration expenses budget, plant utilization budget, capital expenditure budget, and selling and distribution budget.
Cash Budget: this is divided into two parts, first is the summary of receipts and the second is the summary of payments. The difference in the two results to a cash surplus or deficit for the budget period.
STEP THREE: DEVELOP THE MASTER BUDGETS:
The master budget is the budgeted results of the company’s operations and its budgeted financial position for the budget period. This comprise of the budgeted profit or loss account for the period, and the budgeted balance sheet for the period.
Naghabun, Osayande is a Chartered Accountant, blogger, writer and business development professional. He loves helping Small and Medium Enterprises to grow. He can be reached on 08148358201 for further discussion on this subject. Or send an email to firstname.lastname@example.org