Budget process


In business planning you differentiate between 3 stages. – Strategic planning (long term – 5 years) – Tactical planning (mid term) – Operational planning (up to 1 year) 

The well known budgeting process is considered as operational planning, is done in fall and covers a time span of up to one year.

How it all is planned?

The turnovers are combined in the sales planning. The sales are estimated in cooperation with the accountable sales person. And with consideration of growth rates from midterm planning they are planned as precisely as possible. In most cases companies budget with the top down principle. That means that they set a total revenue and break it down on different regions or products.

The whole personnel expenditures are included in staff planning. On one hand the present staff is planned on the other hand the planner has to consider fluctuation in demand that is caused by growth of the company and adjust the staff accordingly. The social costs and changes in the working hours (shift operation) are another important factor. Finally there are planned trainings and all costs that are caused due to personnel development.

Today an important fact is the marketing budget. It includes expenses for advertising campaigns (Print, Internet) or other costs for product launches and new services. There can also be costs for expanding into new markets. The expenses for exhibitions, presentations and customer events are also budgeted in this sector.

All expensive investments are included in the investment plan (including planning amortizations). Those investments don’t go into the profit and loss account because they can be activated. But it is essential to plan them carefully. They are the basis of the right strategic development and are very capital-intensive and stand on top of a clean liquidity plan. In an industrial company those are primary the acquisition of machines and facilities. In service companies it is the acquisition of new offices and new locations. But also in the IT sector investments are gaining importance. A new ERP system can quickly excel millions of Euros.

As mentioned it is important to plan liquidity. It is important to keep the company oxygenated. You often will hear the proverb: „Profitability is the nourishment of a company, liquidity is the air it’s breathing“. You cannot simply take the expenses and revenues of other budgets and put them directly into the liquidity plan because you have to consider payment dates. In most cases wages are payed at the end of the month but the overall turnover is cash effective 30 days after invoicing. All the events have to be planned carefully that you can cover the bottlenecks that are occurring with banks and other investors.

All other costs are included in the overhead costs. Here you find rent for buildings, office supplies and everything else that doesn’t occur in another budget. In different sectors the overhead costs are higher and therefore more important or they are simple and done easily.

What does the planning offer?

After every process is done you get: – The income statement – Projected balance sheet – Cash flow plan

Those plans are broken down on the cost centers so everybody gets the new directive for the year in cold print.

What do you have to consider for an optimal budgeting process?

It all starts with a good and clear planning. It should be communicated as early as possible to all involved parties. This ensures that every involved person can provide the necessary resources on time. After that the information software and other IT tools need to be in place and explained to the staff. This is valid for planning with Excel but does also apply in an ERP. It should be announced, who should put in what data into the system and when they should do it. The deadlines and responsibilities should be communicated in a clear way and when which planing has to be complete. For presentations to the company management, presentations should be prepared as they are asked for. In most cases, after the presentation, the plan has to be revised.

After some back and forth the budget for the next year should be set. If you have any problems with this process you can get support of an Interim expert. You can email me – contact@baumann-finance.ch and I will be happy to answer your questions.

I want to end this text with a quote: „Setting up a budget is the art of distributing disappointments evenly.“ Maurice Stans (*1908), former American government official

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