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Weekly UpdatesThis checklist is for managers who have responsibility for drawing up and presenting a budget.
Budgeting is at the heart of the way organisations measure what they want to achieve. It is a key planning device and one that organisations are increasingly democratising. Drawing up a budget is no longer the sole province of accountants and finance directors. These days everyone in the organisation has a role to play in drawing up a budget. There is no room for financially naive managers in today's organisations.
Drawing up a budget involves a mix of number skills and people skills like negotiation and listening--it is not a mechanistic process. It is dynamic and involves managers throughout the organisation.
Management Standards
This checklist has relevance to the MSC National Occupational Standards for Management: Key Roles B and G--Manage Resources and Manage Projects.
Definition
A budget is a statement of expenditure or income that has been allocated under a set of headings, for a set period of time.
Advantages of budgeting
Budgets:
* are a key tool in the achievement of a company's strategic plan
* help managers in different parts of the organisation to coordinate their activities
* are a way of helping managers take financial responsibility
* are an effective way of allocating funds and planning
* are a way of communicating important financial information
* are motivating--they set clear goals
* help managers to think about the future and set plans
* help managers to measure their own performance and the performance of their team.
Disadvantages of failing to budget (or budgeting poorly)
Poor budgeting or no budgeting at all presents a whole range of disadvantages including:
* unreliable financial information
* a breakdown in financial control.
Action checklist
1. Identify the key plans and objectives for the organisation
You need to identify these objectives so that you know what over-riding factors to consider when preparing your budget. Budgeting is to some extent a secondary process--secondary to the strategic or business plans of the organisation. Only when these are clear can a suitable budget be prepared.
Is it, for example, a budget for growth or for standing still? This will affect the way you draw up figures.
2. Determine the key or limiting factors
Every organisation has some factors which limit its growth. In most cases this is the volume of sales, or the number of customers, or the amount of manufacturing plant available. Whatever they are, these key factors have significance for planning and budgeting. There's no point drawing up a superb budget based on selling a high volume if either it is unrealistic to reach this level of sales or your organisation couldn't handle the work load to reach the figure.
3. What is coming in?
Look at the range of sources--are you generating funds, or is money allocated at the beginning of each year? Will you really get in all the money you have noted down, or will some come in the next financial year, or fall through? How much of it is guaranteed income?
4. What is going out?
Estimate your expected costs. Break down costs under different headings. The range of cost headings usually include those related to:
* staffing, wages, pensions, training etc.
* premises, rent, repairs, heating etc.
* a company's legal duties
* materials used--stationery, telephone, raw materials
* any other business costs, such as insurance, company tax etc.
The general principle is to divide the budget up under whatever headings seem sensible to you--but, as organisations often group headings together, ensure there is a degree of commonality across the company. Look at last year's budget and use the headings in it as a starting point.
5. Think through the fixed and variable costs
There are two types of costs:
* fixed costs--those costs you have no matter how much extra work the organization handles, such as permanent staff costs
* variable costs--costs that are dependent on the organization's level of work, such as how much raw material is bought or how much advertising is carried out.
Ask your finance section to help you identify your fixed and variable costs.
6. Decide how to draw up the budget
There are different theories about how you should begin to draw up a budget.
Incremental budgeting--this is based on using last year's figures. If you use this method you would base a budget on how last year's went--with, of course, an adjustment to take things like inflation into account. This is a quick and simple way of putting together a first draft of a budget but if last year's budget was wrong you keep adding to your mistakes. It is also a conservative approach, making the assumption that present objectives are right and that there is a high degree of continuity.
If you are using an incremental approach, work out how far last year's budget actually reflected reality. Write down:
* the budget
* the way it actually worked--what you actually spent
* the variance--how far was the budget out, and why?
Zero-based budgeting--here an analysis of each cost from fresh at the start of each year is made. Analyse each cost as the picture looks now rather than referring to the budget of the previous year. This is a fundamental approach, requiring you to justify every item and redefine your objectives.
7. Collect all the information you need to set this year's budget
Look at last year's budget and learn what you can for this year's. Make sure you have spoken to all the stakeholders before drawing up the budget to make sure they've had an input and you have not missed anything.
Look at the organisation's objectives and targets to see if and how your budget needs to be adjusted or reconstructed.
Assess all external and internal factors which may have a bearing on your performance. These may include: the rate of inflation, bank lending rates, trade prospects which are forecast for the following year, and whether you wish to stimulate the market (and therefore the resources, money, people and equipment necessary to do so). Budgeting for growth also means having the available resources to handle the increased levels of business if the marketing works, otherwise you will be stimulating a demand you cannot meet.
8. Ask some important questions
The following questions will help to prepare the budget accurately.
* Am I clear about strategic objectives and how they affect my area of responsibility?
* Have I accurately forecast the number of people the job requires to meet objectives?
* Are there likely to be any changes?
* Am I clear about the income?
* Am I clear about outgoings?
* Are there any factors on the horizon that might throw the forecast into chaos?
9. Draw up the budget
Keep detailed notes on why you have included the figures you have in your budget. It may seem obvious when you write it down, but you might not remember how you calculated your budget in six months' time. Remember to build in an allowance for contingency--the "what if"--for things that may go wrong. This may reflect on the revenue targets foreseen if levels of business do not meet expectations, or on controlling expenditure early in the financial year until you obtain a clearer picture of how your budget is performing.
10. Build in budget control parameters
You or your finance department will need to track income and expenditure against the budget. This may be monthly, weekly or even daily, depending on the business. See the checklist on controlling budgets for more information.
11. Present the budget
If you have to make a presentation on the budget to senior managers or colleagues in addition to the written statement, then make sure you present a picture of reality, with possible down-turns and problems, rather than attempting to impress. If it looks optimistic, say so and why; if it looks pessimistic, make sure you convey the appropriate message.
Dos and don'ts for drawing up a budget
Do
* Be realistic.
* Take last year's budget and actual result (what you really spent) into account.
* Be aware of fixed and variable costs.
* Develop budget headings that work, both for you and for the organisation as a whole.
* Collect information thoroughly.
* Decide whether to go for a zero-based or incremental approach.
Don't
* Be over-optimistic.
* Leave too little time.
* Draw up a budget without involving others.
Useful reading
Books
Related checklists
* Controlling a budget
* Strategic planning
* Writing a business plan
Thought starters
* Do you understand the major objectives laid down within your organisation's current strategic plan?
* Do you know how your area of responsibility fits within the current strategic plan?
* Have you listened carefully to all the stakeholders?
* Have you checked last year's budget?
* Have you drawn up a list of budget headings?
* Have you left enough time for the process?
Further Information
Checklists are available in the following formats:
* Individual checklists.
* A complete set of 1975 on CD-ROM or in hard copy.
* Checklists with permission to photocopy.
Full details of the range of checklists available can be obtained from:
Lavis Marketing, 73 Lime Walk, Headington, Oxford, OX3 7AD Tel: 0845 702 3736 (local rate call) Fax: + 44 1865 750079 or from Checkpoint on the Chartered Management Institute's website at www.managers.org.uk
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